A novel portfolio construction strategy based on the core-periphery profile of stocks

TL;DR

This study demonstrates that portfolios constructed based on the core-periphery structure of stock networks outperform traditional strategies, offering a statistically significant approach for improved trading performance.

Contribution

It introduces a novel portfolio construction method utilizing the core-periphery profile of financial networks derived from stock correlations.

Findings

Portfolios based on core-periphery structure outperform traditional strategies.

The core-periphery profile is statistically significant across different time periods.

The approach is effective for both inter-day and intraday trading.

Abstract

This paper highlights the significance of mesoscale structures, particularly the core-periphery structure, in financial networks for portfolio optimization. We build portfolios of stocks belonging to the periphery part of the Planar maximally filtered subgraphs of the underlying network of stocks created from Pearson correlations between pairs of stocks and compare its performance with some well-known strategies of Pozzi et. al. hinging around the local indices of centrality in terms of the Sharpe ratio, returns and standard deviation. Our findings reveal that these portfolios consistently outperform traditional strategies and further the core-periphery profile obtained is statistically significant across time periods. These empirical findings substantiate the efficacy of using the core-periphery profile of the stock market network for both inter-day and intraday trading and provide valuable insights for investors seeking better returns.