Construction, management, and performance of sparse Markowitz portfolios
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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 l1-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.
Acknowledgments
We thank Stéphane Chrétien and Christine De Mol for various insights about this project that have significantly improved it. We acknowledge partial support from Tea-Cegos Deployment S.L. and the Centro para el Desarrollo Tecnológico Industrial (CDTI, project number IDI-20100893) of the Spanish Ministerio de Ciencia e Innovación.
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Supplemental Material
The online version of this article (DOI:10.1515/snde-2012-0010) offers supplementary material, available to authorized users.
©2014 by De Gruyter
Articles in the same Issue
- Frontmatter
- Forecast densities for economic aggregates from disaggregate ensembles
- Construction, management, and performance of sparse Markowitz portfolios
- An extensive study on Markov switching models with endogenous regressors
- Do food commodity prices have asymmetric effects on euro-area inflation?
- The effect of round-off error on long memory processes
Articles in the same Issue
- Frontmatter
- Forecast densities for economic aggregates from disaggregate ensembles
- Construction, management, and performance of sparse Markowitz portfolios
- An extensive study on Markov switching models with endogenous regressors
- Do food commodity prices have asymmetric effects on euro-area inflation?
- The effect of round-off error on long memory processes
