Low Volatility Stock Portfolio Through High Dimensional Bayesian Cointegration

Parley R Yang and Alexander Y Shestopaloff

Papers from arXiv.org

Abstract: We employ a Bayesian modelling technique for high dimensional cointegration estimation to construct low volatility portfolios from a large number of stocks. The proposed Bayesian framework effectively identifies sparse and important cointegration relationships amongst large baskets of stocks across various asset spaces, resulting in portfolios with reduced volatility. Such cointegration relationships persist well over the out-of-sample testing time, providing practical benefits in portfolio construction and optimization. Further studies on drawdown and volatility minimization also highlight the benefits of including cointegrated portfolios as risk management instruments.

Date: 2024-07
New Economics Papers: this item is included in nep-ets and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2407.10175

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