Improving the volatility of the optimal weights of the Markowitz model

Roberto Ortiz, Mauricio Contreras and Cristhian Mellado

Economic Research-Ekonomska Istraživanja, 2022, vol. 35, issue 1, 2836-2858

Abstract: The main practical problems that are faced by portfolio optimisation under the Markowitz model are (i) its lower out-of-sample performance than the naive 1/n rule, (ii) the resulting asset weights with extreme values, and (iii) the high sensitivity of those asset weights to small changes in the data. In this study, we aim to overcome these problems by using a computation method that shifts the smaller eigenvalues of the covariance matrix to the space that houses the eigenvalue spectrum of a random matrix. We evaluate this new method using a rolling sample approach. We obtain portfolios that show both more stable asset weights and better performance than the 1/n rule. We expect that this new computation method will be extended to several problems in portfolio management, thereby improving their consistency and performance.

Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1080/1331677X.2021.1981963 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:reroxx:v:35:y:2022:i:1:p:2836-2858

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/rero20

DOI: 10.1080/1331677X.2021.1981963

Access Statistics for this article

Economic Research-Ekonomska Istraživanja is currently edited by Marinko Skare

More articles in Economic Research-Ekonomska Istraživanja from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().