Identifying Small Mean Reverting Portfolios

TITLE: Identifying Small Mean Reverting Portfolios.

AUTHORS: Alexandre d'Aspremont

ABSTRACT: Given multivariate time series, we study the problem of forming portfolios with maximum mean reversion while constraining the number of assets in these portfolios. We show that it can be formulated as a sparse canonical correlation analysis and study various algorithms to solve the corresponding sparse generalized eigenvalue problems. After discussing penalized parameter estimation procedures, we study the sparsity versus predictability tradeoff and the impact of predictability in various markets.

STATUS: Quantitative Finance, 11(3), pp. 351-364, March 2011.

ArXiv PREPRINT: arXiv:0708.3048

PAPER: Identifying Small Mean Reverting Portfolios in pdf