Mean-Reversion within Cluster Industries
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Clustering-Based Sector Investing
Matteo Bagnara; Milad Goodarzi
- DEGoethe University Frankfurt
- Ecole des Hautes Etudes Commerciales du Nord
- DELeibniz Institute for Financial Research SAFE
- ?EDHEC Business School - Scientific Portfolio
Strategy in a nutshell
Uses bisecting K-means clustering on firm characteristics to classify stocks into economically meaningful sectors, improving portfolio construction, mean-reversion trading, and investment strategy performance.
Economic rationale
Cluster-based sectors outperform traditional classification systems by enhancing sector cohesion, enabling higher return comovement, profitable strategies, and dynamic, stable sector representation for investors.
Backtest performance
Annualised return6.4%
Volatility6.5%
Sharpe ratio0.98