Regression, multicollinearity and Markowitz

Roberto Ortiz, Mauricio Contreras and Cristhian Mellado

Finance Research Letters, 2023, vol. 58, issue PC

Abstract: This paper shows that the usual drawbacks of the Markowitz model (high optimal weights, high volatility and low out-of-sample performance) can be overcome by correcting for the multicollinearity of individual assets that directly affect the estimation of portfolio weights. That improves the stability, predictability and out-of-sample performance of the Markowitz model, allowing it to provide better results than the 1/n rule.

Keywords: Markowitz mean–variance optimization G11; Estimation of optimal portfolio weights G11; Financial econometrics C58; Multicollinearity C58 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pc:s1544612323009224

DOI: 10.1016/j.frl.2023.104550

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