Dynamic portfolio selection with sector-specific regularization

Christian Hafner and Linqi Wang

No 2020032, LIDAM Discussion Papers ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: This paper proposes a new algorithm for dynamic portfolio selection that takes a sector structure into account. We consider regularization with respect to within and between sector variation of portfolio weights, additional to sparsity and trans- action cost controls. Our model includes two special cases as benchmarks: a dy- namic conditional correlation model with shrinkage estimation of the unconditional covariance matrix, and the equally weighted portfolio. We propose an algorithm for estimation of the model parameters and calibration of the penalty terms based on cross-validation. In an empirical study, we find that the within-sector penalty has by far the highest contribution to the reduction of out-of-sample volatility of portfolio returns. Our model improves both the pure DCC with shrinkage and the equally-weighted portfolio out-of-sample.

Keywords: dynamic conditional correlation; cross-validation; shrinkage; industry sectors (search for similar items in EconPapers)
JEL-codes: C14 C43 Z11 (search for similar items in EconPapers)
Pages: 33
Date: 2020-01-01
New Economics Papers: this item is included in nep-ecm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://dial.uclouvain.be/pr/boreal/fr/object/bore ... tastream/PDF_01/view (application/pdf)

Related works:
Working Paper: Dynamic portfolio selection with sector-specific regularization (2022)
Working Paper: Dynamic portfolio selection with sector-specific regularization (2022)
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:aiz:louvad:2020032

Access Statistics for this paper

More papers in LIDAM Discussion Papers ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA) Voie du Roman Pays 20, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Nadja Peiffer (nadja.peiffer@uclouvain.be).