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Construction, management, and performance of sparse Markowitz portfolios

Construction, management, and performance of sparse Markowitz portfolios Abstract We study different implementations of the sparse portfolio construction and rebalancing method introduced by Brodie et al. (Brodie, J., I. Daubechies, C. De Mol, D. Giannone, and I. Loris. 2009. “Sparse and Stable Markowitz Portfolios.” PNAS 106 (30): 12267–12272). This technique is based on the use of a l 1 -norm (sum of the absolute values) type penalization on the portfolio weights vector that regularizes the Markowitz portfolio selection problem by automatically eliminating the dynamical redundancies present in the time evolution of asset prices. We make specific recommendations as to the different estimation techniques for the parameters needed in the use of the method and we prove its good performance in realistic situations involving different rebalancing frequencies and transaction costs. Our empirical findings show that the beneficial effects of the use of sparsity constraints are robust with respect to the choice of trend and covariance estimation methods used in its implementation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

Construction, management, and performance of sparse Markowitz portfolios

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References (19)

Publisher
de Gruyter
Copyright
Copyright © 2014 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2012-0010
Publisher site
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Abstract

Abstract We study different implementations of the sparse portfolio construction and rebalancing method introduced by Brodie et al. (Brodie, J., I. Daubechies, C. De Mol, D. Giannone, and I. Loris. 2009. “Sparse and Stable Markowitz Portfolios.” PNAS 106 (30): 12267–12272). This technique is based on the use of a l 1 -norm (sum of the absolute values) type penalization on the portfolio weights vector that regularizes the Markowitz portfolio selection problem by automatically eliminating the dynamical redundancies present in the time evolution of asset prices. We make specific recommendations as to the different estimation techniques for the parameters needed in the use of the method and we prove its good performance in realistic situations involving different rebalancing frequencies and transaction costs. Our empirical findings show that the beneficial effects of the use of sparsity constraints are robust with respect to the choice of trend and covariance estimation methods used in its implementation.

Journal

Studies in Nonlinear Dynamics & Econometrics – de Gruyter

Published: Sep 1, 2014

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