Dynamic asset trees and portfolio analysis

Research output: Contribution to journalArticle

Researchers

Research units

  • Budapest University of Technology and Economics
  • Helsinki University of Technology

Abstract

The minimum spanning tree, based on the concept of ultrametricity, is constructed from the correlation matrix of stock returns and provides a meaningful economic taxonomy of the stock market. In order to study the dynamics of this asset tree we characterise it by its normalised length and by the mean occupation layer, as measured from an appropriately chosen centre called the 'central node'. We show how the tree evolves over time, and how it shrinks strongly, in particular, during a stock market crisis. We then demonstrate that the assets of the optimal Markowitz portfolio lie practically at all times on the outskirts of the tree. We also show that the normalised tree length and the investment diversification potential are very strongly correlated.

Details

Original languageEnglish
Pages (from-to)285-288
JournalEuropean Physical Journal B
Volume30
Issue number3
Publication statusPublished - 2002
MoE publication typeA1 Journal article-refereed

ID: 10195523