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Regular version of the site

Book chapter

Market Graph and Markowitz Model

P. 301-313.

 Market graph is known to be a useful tool for market network analysis. Cliques and independent sets of the market graph give an information about con- centrated dependent sets of stocks and distributed independent sets of stocks on the market. In the present paper the connections between market graph and classical Markowitz portfolio theory are studied. In particular, efficient frontiers of cliques and independent sets of the market graph are compared with the efficient frontier of the market. The main result is: efficient frontier of the market can be well ap- proximated by the efficient frontier of the maximum independent set of the market graph constructed on the sets of stocks with the highest Sharp ratio. This allows to reduce the number of stocks for portfolio optimization without the loss of quality of obtained portfolios. In addition it is shown that cliques of the market graphs are not suitable for portfolio optimization.

In book

Edited by: S. Butenko, C. Floudas, T. M. Rassias. NY: Springer, 2014.