Mean-Reverting Portfolio Design via Majorization-Minimization Method
Portfolio Management
2016-11-28 v1 Computational Finance
Abstract
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 and taking into consideration the variance of the portfolio and an investment budget constraint at the same time. An efficient algorithm based on the majorization-minimization (MM) method is proposed to solve the problem. Numerical results show that our proposed mean-reverting portfolio design method can significantly outperform every underlying single spread and the benchmark method in the literature.
Keywords
Cite
@article{arxiv.1611.08393,
title = {Mean-Reverting Portfolio Design via Majorization-Minimization Method},
author = {Ziping Zhao and Daniel P. Palomar},
journal= {arXiv preprint arXiv:1611.08393},
year = {2016}
}
Comments
5 pages, 2 figures, to appear in Proc. of the 50th Asilomar Conference on Signals, Systems and Computers