Cluster Analysis : Application to Sector Indices and Empirical Validation

The main objective of this study is to classify economic sectors using the clustering method, and to validate the classification from an economic point of view. The method is intended to create clusters, or portfolios, whose components show similar characteristics. The method also allows investors to find the most significant representatives of a particular market or sector, in order to reduce the size of an asset universe, for example. Our analysis uses mainly monthly returns of Datastream sector indices. The main part of the study consists of validating results using the mean variance criterion. This validation allows us to confirm the economic relevance and stability of the clusters obtained