Covariance matrix filtering with bootstrapped hierarchies

Christian Bongiorno (1) , Damien Challet (1)

1 MICS - Mathématiques et Informatique pour la Complexité et les Systèmes

Cleaning covariance matrices is a highly non-trivial problem, yet of central importance in the statistical inference of dependence between objects. We propose here a probabilistic hierarchical clustering method, named Bootstrapped Average Hierarchical Clustering (BAHC) that is particularly effective in the high-dimensional case, i.e., when there are more objects than features. When applied to DNA microarray, our method yields distinct hierarchical structures that cannot be accounted for by usual hierarchical clustering. We then use global minimum-variance risk management to test our method and find that BAHC leads to significantly smaller realized risk compared to state-of-the-art linear and nonlinear filtering methods in the high-dimensional case. Spectral decomposition shows that BAHC better captures the persistence of the dependence structure between asset price returns in the calibration and the test periods.

Domaines: Méthodologie [stat.ME]; Gestion des risques [q-fin.RM]

Christian Bongiorno, Damien Challet. Covariance matrix filtering with bootstrapped hierarchies. PLoS ONE, 2021, 16 (1), pp.e0245092. ⟨10.1371/journal.pone.0245092⟩. ⟨hal-02506848⟩