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Statistical Industry Classification

Author

Listed:
  • Zura Kakushadze
  • Willie Yu

Abstract

We give complete algorithms and source code for constructing (multilevel) statistical industry classifications, including methods for fixing the number of clusters at each level (and the number of levels). Under the hood there are clustering algorithms (e.g., k-means). However, what should we cluster? Correlations? Returns? The answer turns out to be neither and our backtests suggest that these details make a sizable difference. We also give an algorithm and source code for building "hybrid" industry classifications by improving off-the-shelf "fundamental" industry classifications by applying our statistical industry classification methods to them. The presentation is intended to be pedagogical and geared toward practical applications in quantitative trading.

Suggested Citation

  • Zura Kakushadze & Willie Yu, 2016. "Statistical Industry Classification," Journal of Risk & Control, SCIENPRESS Ltd, vol. 3(1).
    • Handle: RePEc:spt:rmkjrc:v:3:y:2016:i:1:f:
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    References listed on IDEAS

    as
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    3. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
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