Network Models to Improve Robot Advisory Portfolio Asset Allocation

25 Pages Posted: 18 Mar 2020

See all articles by Paolo Giudici

Paolo Giudici

University of Pavia

Gloria Polinesi

affiliation not provided to SSRN

Alessandro Spelta

University of Pavia - Department of Economics and Management

Date Written: March 22, 2019

Abstract

Robot advisory services are rapidly expanding, responding to a growing interest people have in directly managing their savings. Robot advisors may reduce costs and improve the quality of the service, making user involvement more transparent. However, they may underestimate market risks, especially when highly correlated assets are being considered, leading to a mismatch between investors' expected and actual risk. The aim of the paper is to enhance robot advisory portfolio allocation, taking users' preference into account. In particular, we demonstrate how Random Matrix Theory and Network models can be combined to construct investment portfolios that provide lower risks with respect to standard Markovitz portfolios. To demonstrate the advantages of this approach we employ the observed returns of a large set of ETFs, which is representative of the financial products at the ground of the activity of robot advisors.

Keywords: Correlation networks, Network centrality, Portfolio optimization, Random Matrix theory

JEL Classification: C01, C32, C58, G21, G32

Suggested Citation

Giudici, Paolo and Polinesi, Gloria and Spelta, Alessandro, Network Models to Improve Robot Advisory Portfolio Asset Allocation (March 22, 2019). Available at SSRN: https://ssrn.com/abstract=3556381 or http://dx.doi.org/10.2139/ssrn.3556381

Paolo Giudici (Contact Author)

University of Pavia ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

Gloria Polinesi

affiliation not provided to SSRN

Alessandro Spelta

University of Pavia - Department of Economics and Management ( email )

Strada Nuova, 65
Pavia, 27100
Italy

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