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Published in:
2011 | OriginalPaper | Chapter
Sector Classification in Stock Markets: A Latent Class Approach
Authors : Michele Costa, Luca De Angelis
Published in: Classification and Multivariate Analysis for Complex Data Structures
Publisher: Springer Berlin Heidelberg
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Stock indices related to specific economic sectors play a major role in portfolio diversification. Notwithstanding its importance, the traditional sector classification shows several flaws and it may not be able to properly discriminate the risk-return profile of financial assets. We propose a latent class approach in order to correctly classify the stock companies into homogenous groups under risk-return profile and to obtain sector indices which are consistent with the standard portfolio theory. Our results allow to introduce a methodological dimension in the stock’s classification and to improve the reliability of sector portfolio diversification.