2016/11/25 by Zhao, Ziping, Palomar, Daniel P.
#Computational Finance (q-fin.CP) #FOS: Economics and business #Portfolio Management (q-fin.PM)
paper · doi:10.48550/arxiv.1611.08393
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.