IDEAS home Printed from https://ideas.repec.org/a/oup/revfin/v20y2016i3p1259-1287..html
   My bibliography  Save this article

Sparse Weighted-Norm Minimum Variance Portfolios

Author

Listed:
  • Yu-Min Yen

Abstract

We propose to impose a weighted l1 and squared l2 norm penalty on the portfolio weights to improve out-of-sample (OOS) performances of portfolio optimization when the number of assets becomes large. We show that under certain conditions, the realized risk of the optimal minimum variance portfolio (MVP) obtained from the strategy can asymptotically be lower than those of benchmark portfolios with a high probability. Our theoretical results imply that penalty parameters for the weighted-norm penalty can be specified as a simple function of the number of assets and sample size. With the theoretical results, we also develop an automatic calibration procedure for choosing the penalty parameters. We demonstrate superior OOS performances of the weighted-norm MVP with two real data sets. Finally, we propose several alternative norm penalties and show that their OOS performances are comparable to the weighted-norm strategy.

Suggested Citation

  • Yu-Min Yen, 2016. "Sparse Weighted-Norm Minimum Variance Portfolios," Review of Finance, European Finance Association, vol. 20(3), pages 1259-1287.
  • Handle: RePEc:oup:revfin:v:20:y:2016:i:3:p:1259-1287.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rof/rfv024
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fan, Jianqing & Liao, Yuan & Shi, Xiaofeng, 2015. "Risks of large portfolios," Journal of Econometrics, Elsevier, vol. 186(2), pages 367-387.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:jbfina:v:82:y:2017:i:c:p:244-264 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:revfin:v:20:y:2016:i:3:p:1259-1287.. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/eufaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.