Sector Classification through non-Gaussian Similarity
AbstractStandard sector classification frameworks present drawbacks that might hinder portfolio manager. This paper introduces a new non-parametric approach to equity classification. Returns are decomposed into their fundamental drivers through Independent Component Analysis (ICA). Stocks are then classified according to the relative importance of identified fundamental drivers for their returns. A method is developed permitting the quantification of these dependencies, using a similarity index. Hierarchical clustering allows for grouping the stocks into new classes. The resulting classes are compared with those from the 2-digit GICS system for U.S. blue chip companies. It is shown that specific relations between stocks are not captured by the GICS framework. The method is applied on two different samples and tested for robustness.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/95542.
Date of creation: 2010
Date of revision:
Publication status: Published in: Applied financial economics (2010) v.20 n° 11,p.861-878
Other versions of this item:
- M. Vermorken & A. Szafarz & H. Pirotte, 2010. "Sector classification through non-Gaussian similarity," Applied Financial Economics, Taylor & Francis Journals, vol. 20(11), pages 861-878.
- Maximilian Vermorken & Ariane Szafarz & Hugues Pirotte, 2008. "Sector classification through non-Gaussian similarity," Working Papers CEB 08-032.RS, ULB -- Universite Libre de Bruxelles.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G19 - Financial Economics - - General Financial Markets - - - Other
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