Market Graph Clustering Via QUBO and Digital Annealing

Our goal is to find representative nodes of a market graph that best replicate the returns of a broader market graph (index), a common task in the financial industry. We model our reference index as a market graph and express the index tracking problem in a quadratic K-medoids form. We take advantage of a purpose built hardware architecture, the Fujitsu Digital Annealer, to circumvent the NP-hard nature of the problem and solve our formulation efficiently. In this article, we combine three separate areas of the literature, market graph models, K-medoid clustering and quadratic binary optimization modeling, to formulate the index-tracking problem as a quadratic K-medoid graph-clustering problem. Our initial results show we accurately replicate the returns of a broad market index, using only a small subset of its constituent assets. Moreover, our quadratic formulation allows us to take advantage of recent hardware advances, to overcome the NP-hard nature of the problem.Comment: 9 pages, 1 figure, 4 subfigure

A DC Programming Approach for Solving Multicast Network Design Problems via the Nesterov Smoothing Technique

This paper continues our effort initiated in [9] to study Multicast Communication Networks, modeled as bilevel hierarchical clustering problems, by using mathematical optimization techniques. Given a finite number of nodes, we consider two different models of multicast networks by identifying a certain number of nodes as cluster centers, and at the same time, locating a particular node that serves as a total center so as to minimize the total transportation cost through the network. The fact that the cluster centers and the total center have to be among the given nodes makes this problem a discrete optimization problem. Our approach is to reformulate the discrete problem as a continuous one and to apply Nesterov smoothing approximation technique on the Minkowski gauges that are used as distance measures. This approach enables us to propose two implementable DCA-based algorithms for solving the problems. Numerical results and practical applications are provided to illustrate our approach

Optimal dynamic portfolio selection with earnings-at-risk

In this paper we investigate a continuous-time portfolio selection problem. Instead of using the classical variance as usual, we use earnings-at-risk (EaR) of terminal wealth as a measure of risk. In the settings of Black-Scholes type financial markets and constantly-rebalanced portfolio (CRP) investment strategies, we obtain closed-form expressions for the best CRP investment strategy and the efficient frontier of the mean-EaR problem, and compare our mean-EaR analysis to the classical mean-variance analysis and to the mean-CaR (capital-at-risk) analysis. We also examine some economic implications arising from using the mean-EaR model. © 2007 Springer Science+Business Media, LLC.postprin

Will the US Economy Recover in 2010? A Minimal Spanning Tree Study

We calculated the cross correlations between the half-hourly times series of the ten Dow Jones US economic sectors over the period February 2000 to August 2008, the two-year intervals 2002--2003, 2004--2005, 2008--2009, and also over 11 segments within the present financial crisis, to construct minimal spanning trees (MSTs) of the US economy at the sector level. In all MSTs, a core-fringe structure is found, with consumer goods, consumer services, and the industrials consistently making up the core, and basic materials, oil and gas, healthcare, telecommunications, and utilities residing predominantly on the fringe. More importantly, we find that the MSTs can be classified into two distinct, statistically robust, topologies: (i) star-like, with the industrials at the center, associated with low-volatility economic growth; and (ii) chain-like, associated with high-volatility economic crisis. Finally, we present statistical evidence, based on the emergence of a star-like MST in Sep 2009, and the MST staying robustly star-like throughout the Greek Debt Crisis, that the US economy is on track to a recovery.Comment: elsarticle class, includes amsmath.sty, graphicx.sty and url.sty. 68 pages, 16 figures, 8 tables. Abridged version of the manuscript presented at the Econophysics Colloquim 2010, incorporating reviewer comment

Influence of the Time Scale on the Construction of Financial Networks

BACKGROUND: In this paper we investigate the definition and formation of financial networks. Specifically, we study the influence of the time scale on their construction. METHODOLOGY/PRINCIPAL FINDINGS: For our analysis we use correlation-based networks obtained from the daily closing prices of stock market data. More precisely, we use the stocks that currently comprise the Dow Jones Industrial Average (DJIA) and estimate financial networks where nodes correspond to stocks and edges correspond to none vanishing correlation coefficients. That means only if a correlation coefficient is statistically significant different from zero, we include an edge in the network. This construction procedure results in unweighted, undirected networks. By separating the time series of stock prices in non-overlapping intervals, we obtain one network per interval. The length of these intervals corresponds to the time scale of the data, whose influence on the construction of the networks will be studied in this paper. CONCLUSIONS/SIGNIFICANCE: Numerical analysis of four different measures in dependence on the time scale for the construction of networks allows us to gain insights about the intrinsic time scale of the stock market with respect to a meaningful graph-theoretical analysis

Exploring Statistical and Population Aspects of Network Complexity

The characterization and the definition of the complexity of objects is an important but very difficult problem that attracted much interest in many different fields. In this paper we introduce a new measure, called network diversity score (NDS), which allows us to quantify structural properties of networks. We demonstrate numerically that our diversity score is capable of distinguishing ordered, random and complex networks from each other and, hence, allowing us to categorize networks with respect to their structural complexity. We study 16 additional network complexity measures and find that none of these measures has similar good categorization capabilities. In contrast to many other measures suggested so far aiming for a characterization of the structural complexity of networks, our score is different for a variety of reasons. First, our score is multiplicatively composed of four individual scores, each assessing different structural properties of a network. That means our composite score reflects the structural diversity of a network. Second, our score is defined for a population of networks instead of individual networks. We will show that this removes an unwanted ambiguity, inherently present in measures that are based on single networks. In order to apply our measure practically, we provide a statistical estimator for the diversity score, which is based on a finite number of samples