Mean-Reverting Portfolio Design via Majorization-Minimization Method

Ziping Zhao and Daniel P. Palomar

Papers from arXiv.org

Abstract: This paper considers the mean-reverting portfolio design problem arising from statistical arbitrage in the financial markets. The problem is formulated by optimizing a criterion characterizing the mean-reversion strength of the portfolio and taking into consideration the variance of the portfolio and an investment budget constraint at the same time. An efficient algorithm based on the majorization-minimization (MM) method is proposed to solve the problem. Numerical results show that our proposed mean-reverting portfolio design method can significantly outperform every underlying single spread and the benchmark method in the literature.

Date: 2016-11
New Economics Papers: this item is included in nep-cmp
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Citations: View citations in EconPapers (4)

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