Sparse and stable Markowitz portfolios.
Journal Article (Journal Article)
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 sum of the absolute values of the portfolio weights. This penalty regularizes (stabilizes) the optimization problem, encourages sparse portfolios (i.e., portfolios with only few active positions), and allows accounting for transaction costs. Our approach recovers as special cases the no-short-positions portfolios, but does allow for short positions in limited number. We implement this methodology on two benchmark data sets constructed by Fama and French. Using only a modest amount of training data, we construct portfolios whose out-of-sample performance, as measured by Sharpe ratio, is consistently and significantly better than that of the naïve evenly weighted portfolio.
Full Text
Duke Authors
Cited Authors
- Brodie, J; Daubechies, I; De Mol, C; Giannone, D; Loris, I
Published Date
- July 2009
Published In
Volume / Issue
- 106 / 30
Start / End Page
- 12267 - 12272
PubMed ID
- 19617537
Pubmed Central ID
- PMC2718382
Electronic International Standard Serial Number (EISSN)
- 1091-6490
International Standard Serial Number (ISSN)
- 0027-8424
Digital Object Identifier (DOI)
- 10.1073/pnas.0904287106
Language
- eng