Hierarchical Clustering To Improve Portfolio Tail Risk Characteristics

Detta är en Master-uppsats från Lunds universitet/Matematisk statistik

Sammanfattning: Many agree that estimating portfolio risks has better estimation possibilities, than estimations on returns. Therefore investors attempts to construct better, more efficient riskmanaged portfolios by diversifying portfolios through factors rather than traditional asset classes. This entails very often in estimations of correlation matrices so complex it cannot be fully analyzed. Hierarchical clustering reduces the complexity, by only focusing on the correlations that matters. Hierarchical clustering uses graph theory, linked to unsupervised machine learning techniques. Hierarchical clustering is obtained by the suggested data and is a formation of a recursive clustering. Several hierarchical clustering methods are presented and evaluated against traditional riskbased portfolios with focus on left hand tail risk. A regime shift, based on momentum is applied to minimize drawdowns. The portfolios are tested on simulated data derived from Bootstrapping simulations and on historical data in a Walk forward optimization process. The results indicate that hierarchical clustering based portfolios are truly diversified and achieve statistically better riskadjusted performances than commonly used portfolio optimization techniques.

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