Fused Lasso approach in portfolio selection

Stefania Corsaro (), Valentina De Simone () and Zelda Marino ()
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Stefania Corsaro: University of Naples “Parthenope”
Valentina De Simone: University of Campania “Luigi Vanvitelli”
Zelda Marino: University of Naples “Parthenope”

Annals of Operations Research, 2021, vol. 299, issue 1, No 4, 47-59

Abstract: Abstract In this work we present a new model based on a fused Lasso approach for the multi-period portfolio selection problem in a Markowitz framework. In a multi-period setting, the investment period is partitioned into sub-periods, delimited by the rebalancing dates at which decisions are taken. The model leads to a constrained optimization problem. Two $$l_1$$ l 1 penalty terms are introduced into the objective function to reduce the costs of the investment strategy. The former is applied to portfolio weights, encouraging sparse solutions. The latter is a penalization on the difference of wealth allocated across the assets between rebalancing dates, thus it preserves the pattern of active positions with the effect of limiting the number of transactions. We solve the problem by means of the Split Bregman iteration. We show results of numerical tests performed on real data to validate our model.

Keywords: Multi-period portfolio optimization; $$l_1$$ l 1 -norm; Constrained optimization; Split Bregman; 91G10; 90C30; 65K05 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10479-019-03289-w

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