Details

Autor(en) / Beteiligte

• Fague, Jeremy
• Almeida, Caio

Titel

Robust optimization of time series momentum portfolios

Ist Teil von

• Revista Brasileira de Financas, 2021-01, Vol.19 (1), p.52-69

Ort / Verlag

Rio de Janeiro: Sociedade Brasileira de Financas

Erscheinungsjahr

2021

Link zum Volltext

Quelle

EBSCOhost Business Source Ultimate

Beschreibungen/Notizen

• Mean-Variance Optimization (MVO) is well-known to be extremely sensitive to slight differences in the expected returns and covariances: if these measures change day to day, MVO can specify very different portfolios. Making wholesale changes in portfolio composition can cause the incremental gains to be negated by trading costs. We present a method for regularizing portfolio turnover by using the ℓ1 penalty, with the amount of penalization informed by recent historical data. We find that this method dramatically reduces turnover, while preserving the efficiency of mean-variance optimization in terms of risk-adjusted return. Factoring in reasonable estimates of transaction costs, the turnover-regularized MVO portfolio substantially outperforms a leverage-constrained MVO approach, in terms of risk-adjusted return.