Dynamic asset trees and portfolio analysis

Details Dynamic asset trees and portfolio analysis Dynamic asset trees and portfolio analysis

2002-08-07

arxiv.org/abs/cond-mat/0208131v1

Eur. Phys. J. B 30, (Rapid Note) 285-288 (2002)

Physics

Condensed Matter

Statistical Mechanics

9 pages, 3 figures (encapsulated postscript)

Scientific paper

10.1140/epjb/e2002-00380-9

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 characterize it by its normalized length and by the mean occupation layer, as measured from an appropriately chosen center. We show how the tree evolves over time, and how it shrinks particularly strongly 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 normalized tree length and the investment diversification potential are very strongly correlated.

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