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Integrating prediction in mean-variance portfolio optimization

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  • Andrew Butler
  • Roy H. Kwon

Abstract

Prediction models are traditionally optimized independently from their use in the asset allocation decision-making process. We address this shortcoming and present a framework for integrating regression prediction models in a mean-variance optimization (MVO) setting. Closed-form analytical solutions are provided for the unconstrained and equality constrained MVO case. For the general inequality constrained case, we make use of recent advances in neural-network architecture for efficient optimization of batch quadratic-programs. To our knowledge, this is the first rigorous study of integrating prediction in a mean-variance portfolio optimization setting. We present several historical simulations using both synthetic and global futures data to demonstrate the benefits of the integrated approach.

Suggested Citation

  • Andrew Butler & Roy H. Kwon, 2021. "Integrating prediction in mean-variance portfolio optimization," Papers 2102.09287, arXiv.org, revised Nov 2022.
  • Handle: RePEc:arx:papers:2102.09287
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    References listed on IDEAS

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    Cited by:

    1. Andrew Butler & Roy Kwon, 2021. "Efficient differentiable quadratic programming layers: an ADMM approach," Papers 2112.07464, arXiv.org.
    2. Andrew Butler & Roy H. Kwon, 2021. "Data-driven integration of norm-penalized mean-variance portfolios," Papers 2112.07016, arXiv.org, revised Nov 2022.
    3. Chao Zhang & Zihao Zhang & Mihai Cucuringu & Stefan Zohren, 2021. "A Universal End-to-End Approach to Portfolio Optimization via Deep Learning," Papers 2111.09170, arXiv.org.

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