Risk diversification: a study of persistence with a filtered correlation-network approach

Understand

The evolution with time of the correlation structure of equity returns is studied by means of a filtered network approach investigating persistences and recurrences and their implications for risk diversification strategies.

• We build dynamically Planar Maximally Filtered Graphs from the correlation structure over a rolling window and we study the persistence of the associated Directed Bubble Hierarchical Tree (DBHT) clustering structure.
• We observe that the DBHT clustering structure is quite stable during the early 2000' becoming gradually less persistent before the unfolding of the 2007-2008 crisis.
• The correlation structure eventually recovers persistence in the aftermath of the crisis settling up a new phase, distinct from the pre-cysts structure, where the market structure is less related to industrial sector activity.