Related papers: Identifying Small Mean Reverting Portfolios
Mean-reverting behavior of individuals assets is widely known in financial markets. In fact, we can construct a portfolio that has mean-reverting behavior and use it in trading strategies to extract profits. In this paper, we show that we…
This paper considers mean-variance optimization under uncertainty, specifically when one desires a sparsified set of optimal portfolio weights. From the standpoint of a Bayesian investor, our approach produces a small portfolio from many…
This paper considers the mean-reverting portfolio design problem arising from statistical arbitrage in the financial markets. We first propose a general problem formulation aimed at finding a portfolio of underlying component assets by…
This paper considers the mean-reverting portfolio design problem arising from statistical arbitrage in the financial markets. The problem is formulated by optimizing a criterion characterizing the mean-reversion strength of the portfolio…
Mean-reverting assets are one of the holy grails of financial markets: if such assets existed, they would provide trivially profitable investment strategies for any investor able to trade them, thanks to the knowledge that such assets…
We study an optimization-based approach to con- struct a mean-reverting portfolio of assets. Our objectives are threefold: (1) design a portfolio that is well-represented by an Ornstein-Uhlenbeck process with parameters estimated by maximum…
We consider the problem of portfolio selection within the classical Markowitz mean-variance framework, reformulated as a constrained least-squares regression problem. We propose to add to the objective function a penalty proportional to the…
The econometric challenge of finding sparse mean reverting portfolios based on a subset of a large number of assets is well known. Many current state-of-the-art approaches fall into the field of co-integration theory, where the problem is…
Portfolio optimization involves selecting asset weights to minimize a risk-reward objective, such as the portfolio variance in the classical minimum-variance framework. Sparse portfolio selection extends this by imposing a cardinality…
We use a replica approach to deal with portfolio optimization problems. A given risk measure is minimized using empirical estimates of asset values correlations. We study the phase transition which happens when the time series is too short…
The sparse portfolio selection problem is one of the most famous and frequently-studied problems in the optimization and financial economics literatures. In a universe of risky assets, the goal is to construct a portfolio with maximal…
Portfolio optimization approaches inevitably rely on multivariate modeling of markets and the economy. In this paper, we address three sources of error related to the modeling of these complex systems: 1. oversimplifying hypothesis; 2.…
In this paper, the optimal mean-reverting portfolio (MRP) design problem is considered, which plays an important role for the statistical arbitrage (a.k.a. pairs trading) strategy in financial markets. The target of the optimal MRP design…
The purpose of these notes is to provide a systematic quantitative framework - in what is intended to be a "pedagogical" fashion - for discussing mean-reversion and optimization. We start with pair trading and add complexity by following…
We present the framework of slowly varying regression under sparsity, allowing sparse regression models to exhibit slow and sparse variations. The problem of parameter estimation is formulated as a mixed-integer optimization problem. We…
Mean-reverting portfolios with few assets, but high variance, are of great interest for investors in financial markets. Such portfolios are straightforwardly profitable because they include a small number of assets whose prices not only…
The existing approaches to sparse wealth allocations (1) are limited to low-dimensional setup when the number of assets is less than the sample size; (2) lack theoretical analysis of sparse wealth allocations and their impact on portfolio…
How should one construct a portfolio from multiple mean-reverting assets? Should one add an asset to portfolio even if the asset has zero mean reversion? We consider a position management problem for an agent trading multiple mean-reverting…
Machine learning (ML) methods have been successfully employed in identifying variables that can predict the equity premium of individual stocks. In this paper, we investigate if ML can also be helpful in selecting variables relevant for…
Sparse index tracking is a prominent passive portfolio management strategy that constructs a sparse portfolio to track a financial index. A sparse portfolio is preferable to a full portfolio in terms of reducing transaction costs and…