Asset allocation under predictability and parameter uncertainty using LASSO
| Autor: | Alex Weissensteiner, Andrea Rigamonti |
|---|---|
| Rok vydání: | 2020 |
| Předmět: |
Mathematical optimization
021103 operations research 0211 other engineering and technologies Asset allocation Multivariate normal distribution 02 engineering and technology Cross-validation Management Information Systems Lasso (statistics) Linear regression Econometrics 021108 energy Portfolio optimization Predictability Expected utility hypothesis Information Systems Mathematics |
| Zdroj: | Computational Management Science. 17:179-201 |
| ISSN: | 1619-6988 1619-697X |
| DOI: | 10.1007/s10287-020-00367-4 |
| Popis: | We consider a short-term investor who exploits return predictability in stocks and bonds to maximize mean-variance utility. Since the true parameters are unknown, we resort to portfolio optimization in form of linear regression with LASSO in order to mitigate problems related to estimation errors. As standard cross-validation relies on the assumption of i.i.d. returns, we propose a new type of cross-validation that selects $$ \lambda $$ from simulated returns sampled from a multivariate normal distribution. We find an inverse U-shaped relationship between the selected $$ \lambda $$ and the expected utility, and we show that the optimal value of $$ \lambda $$ declines as the number of observations used to estimate the parameters increases. We finally show how our strategy outperforms some commonly employed benchmarks. |
| Databáze: | OpenAIRE |
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