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Fused Lasso approach in portfolio selection

  • S.I.: Recent Developments in Financial Modeling and Risk Management
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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 \(l_1\) 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.

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Notes

  1. Data available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#BookEquity.

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Authors and Affiliations

  1. Department of Management and Quantitative Studies, University of Naples “Parthenope”, Naples, Italy

    Stefania Corsaro & Zelda Marino

  2. Department of Mathematics and Physics, University of Campania “Luigi Vanvitelli”, Caserta, Italy

    Valentina De Simone

Authors
  1. Stefania Corsaro
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  2. Valentina De Simone
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  3. Zelda Marino
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Correspondence to Zelda Marino.

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This work was partially funded by Research Grant of Università Parthenope, DR No. 953, November 28th, 2016 and INdAM-GNCS Project 2018.

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Corsaro, S., De Simone, V. & Marino, Z. Fused Lasso approach in portfolio selection. Ann Oper Res 299, 47–59 (2021). https://doi.org/10.1007/s10479-019-03289-w

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