Correlation-Based Clustering: Spectral Clustering Methods

Clustering consists in trying to identify groups of “similar behavior”1 - called clusters - from a dataset, according to some chosen characteristics. An example of such a characteristic in finance is the correlation coefficient between two time series of asset returns, whose usage to partition a universe of assets into groups of “close” and “distant” assets thanks to a hierarchical clustering method was originally2 proposed in Mantegna3. In this blog post, I will describe two correlation-based c