Optimizing Sparse Mean-Reverting Portfolio
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 are able to find the optimal weights of stocks to construct portfolio that has the fastest mean-reverting behavior. We further add minimum variance and sparsity constraints to the optimization problem and transform into Semidefinite Programming (SDP) problem to find the optimal weights. Using the optimal weights, we empirically compare the performance of contrarian strategies between non-sparse mean-reverting portfolio and sparse mean-reverting portfolio to argue that the latter provides higher returns when we take into account of transaction costs.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Mean-Reverting Portfolio Design via Majorization-Minimization Method
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…
Mean-Reverting Portfolio Design with Budget Constraint
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 comp…
Mean-Reverting Portfolios: Tradeoffs Between Sparsity and Volatility
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 th…
Mean Reverting Portfolios via Penalized OU-Likelihood Estimation
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 …
Efficient computation of mean reverting portfolios using cyclical coordinate descent
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, wh…