Portfolio selection based on graphs: Does it align with Markowitz-optimal portfolios?

Amelie Hüttner, Jan-Frederik Mai, Stefano Mineo
2016 Dependence Modeling  
Some empirical studies suggest that the computation of certain graph structures from a (large) historical correlation matrix can be helpful in portfolio selection. In particular, a repeated finding is that information about the portfolio weights in the minimum variance portfolio (MVP) from classical Markowitz theory can be inferred from measurements of centrality in such graph structures. The present article compares the two concepts from a purely algebraic perspective. It is demonstrated that
more » ... his heuristic relationship between graph centrality and the MVP does not originate from a structural similarity between the two portfolio selection mechanisms, but instead is due to specific features of observed correlation matrices. This means that empirically found relations between both concepts depend critically on the underlying historical data. Repeated empirical evidence for a strong relationship is hence shown to constitute a stylized fact of financial return time series.
doi:10.1515/demo-2018-0004 fatcat:a3cqc3ytgfdf3o4f7gfoek7rj4