Clustering-based sector investing
- Industry classification groups firms into finer partitions to help investments and empirical analysis. To overcome the well-documented limitations of existing industry definitions, like their stale nature and coarse categories for firms with multiple operations, we employ a clustering approach on 69 firm characteristics and allocate companies to novel economic sectors maximizing the within-group explained variation. Such sectors are dynamic yet stable, and represent a superior investment set compared to standard classification schemes for portfolio optimization and for trading strategies based on within-industry mean-reversion, which give rise to a latent risk factor significantly priced in the cross-section. We provide a new metric to quantify feature importance for clustering methods, finding that size drives differences across classical industries while book-to-market and financial liquidity variables matter for clustering-based sectors.
Author: | Matteo BagnaraORCiDGND, Milad Goodarzi |
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URN: | urn:nbn:de:hebis:30:3-703952 |
URL: | https://ssrn.com/abstract=4528879 |
DOI: | https://doi.org/10.2139/ssrn.4528879 |
Series (Serial Number): | SAFE working paper (397) |
Publisher: | SAFE |
Place of publication: | Frankfurt am Main |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2023 |
Year of first Publication: | 2023 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2023/08/11 |
Tag: | Clustering; Empirical Asset Pricing; Industry Classification; Machine Learning; Risk Premium |
Edition: | August 2023 |
Page Number: | 63 |
Note: | JEL-Klassifikation: C Mathematical and Quantitative Methods / C5 Econometric Modeling / C55 Large Data Sets: Modeling and Analysis C Mathematical and Quantitative Methods / C5 Econometric Modeling / C58 Financial Econometrics |
Note: | We gratefully acknowledge research support from the Leibniz Institute for Financial Research SAFE. |
HeBIS-PPN: | 511906307 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
JEL-Classification: | G Financial Economics / G1 General Financial Markets / G12 Asset Pricing; Trading volume; Bond Interest Rates |
Sammlungen: | Universitätspublikationen |
Licence (German): | ![]() |