Efficient computation of mean reverting portfolios using cyclical coordinate descent

DOI10.1080/14697688.2020.1803497zbMATH Open1479.91357arXiv1905.05841OpenAlexW3084386387MaRDI QIDQ5014198FDOQ5014198

Authors: T. Griveau-Billion, Ben Calderhead 

Publication date: 1 December 2021

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: The econometric challenge of finding sparse mean reverting portfolios based on a subset of a large number of assets is well known. Many current state-of-the-art approaches fall into the field of co-integration theory, where the problem is phrased in terms of an eigenvector problem with sparsity constraint. Although a number of approximate solutions have been proposed to solve this NP-hard problem, all are based on relatively simple models and are limited in their scalability. In this paper we leverage information obtained from a heterogeneous simultaneous graphical dynamic linear model (H-SGDLM) and propose a novel formulation of the mean reversion problem, which is phrased in terms of a quasi-convex minimisation with a normalisation constraint. This new formulation allows us to employ a cyclical coordinate descent algorithm for efficiently computing an exact sparse solution, even in a large universe of assets, while the use of H-SGDLM data allows us to easily control the required level of sparsity. We demonstrate the flexibility, speed and scalability of the proposed approach on S&P$500$, FX and ETF futures data.

Full work available at URL: https://arxiv.org/abs/1905.05841

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zbMATH Keywords

mean reversionBayesian modellingsparse portfoliocyclical coordinate descent

Mathematics Subject Classification ID

Portfolio theory (91G10)

Cites Work

• GPU-accelerated Bayesian learning and forecasting in simultaneous graphical dynamic linear models
• Convergence of a block coordinate descent method for nondifferentiable minimization
• A canonical analysis of multiple time series
• Identifying small mean-reverting portfolios
• Solving norm constrained portfolio optimization via coordinate-wise descent algorithms
• Sparse, mean reverting portfolio selection using simulated annealing
• Optimizing sparse mean reverting portfolios

Cited In (3)

• Identifying small mean-reverting portfolios
• A novel regularization-based optimization approach to sparse mean-reverting portfolios selection
• A penalty decomposition algorithm with greedy improvement for mean‐reverting portfolios with sparsity and volatility constraints

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