Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost
In this paper, we propose a sparse equity portfolio optimization model that aims at minimizing transaction cost by avoiding small investments while promoting diversification to help mitigate the volatility in the portfolio. The former is achieved by including the £₀ -norm regularization of the asset...
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2023
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Online Access: | http://psasir.upm.edu.my/id/eprint/108776/1/Proximal%20linearized%20method%20for%20sparse%20equity.pdf http://psasir.upm.edu.my/id/eprint/108776/ https://journalofinequalitiesandapplications.springeropen.com/articles/10.1186/s13660-023-03055-4 |
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my.upm.eprints.1087762024-10-11T08:30:30Z http://psasir.upm.edu.my/id/eprint/108776/ Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost Sim, Hong Seng Ling, Wendy Shin Yie Leong, Wah June Chen, Chuei Yee In this paper, we propose a sparse equity portfolio optimization model that aims at minimizing transaction cost by avoiding small investments while promoting diversification to help mitigate the volatility in the portfolio. The former is achieved by including the £₀ -norm regularization of the asset weights to promote sparsity. Subjected to a minimum expected return, the proposed model turns out to be an objective function consisting of discontinuous and nonconvex terms. The complexity of the model calls for proximal method, which allows us to handle the objective terms separately via the corresponding proximal operators. We develop an efficient algorithm to find the optimal portfolio and prove its global convergence. The efficiency of the algorithm is demonstrated using real stock data and the model is promising in portfolio selection in terms of generating higher expected return while maintaining good level of sparsity, and thus minimizing transaction cost. SpringerOpen 2023-11-21 Article PeerReviewed text en http://psasir.upm.edu.my/id/eprint/108776/1/Proximal%20linearized%20method%20for%20sparse%20equity.pdf Sim, Hong Seng and Ling, Wendy Shin Yie and Leong, Wah June and Chen, Chuei Yee (2023) Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost. Journal of Inequalities and Applications, 2023 (1). art. no. 152. pp. 1-16. ISSN 1029-242X; ESSN: 1029-242X https://journalofinequalitiesandapplications.springeropen.com/articles/10.1186/s13660-023-03055-4 10.1186/s13660-023-03055-4 |
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In this paper, we propose a sparse equity portfolio optimization model that aims at minimizing transaction cost by avoiding small investments while promoting diversification to help mitigate the volatility in the portfolio. The former is achieved by including the £₀ -norm regularization of the asset weights to promote sparsity. Subjected to a minimum expected return, the proposed model turns out to be an objective function consisting of discontinuous and nonconvex terms. The complexity of the model calls for proximal method, which allows us to handle the objective terms separately via the corresponding proximal operators. We develop an efficient algorithm to find the optimal portfolio and prove its global convergence. The efficiency of the algorithm is demonstrated using real stock data and the model is promising in portfolio selection in terms of generating higher expected return while maintaining good level of sparsity, and thus minimizing transaction cost. |
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Article |
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Sim, Hong Seng Ling, Wendy Shin Yie Leong, Wah June Chen, Chuei Yee |
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Sim, Hong Seng Ling, Wendy Shin Yie Leong, Wah June Chen, Chuei Yee Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
author_facet |
Sim, Hong Seng Ling, Wendy Shin Yie Leong, Wah June Chen, Chuei Yee |
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Sim, Hong Seng |
title |
Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
title_short |
Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
title_full |
Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
title_fullStr |
Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
title_full_unstemmed |
Proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
title_sort |
proximal linearized method for sparse equity portfolio optimization with minimum transaction cost |
publisher |
SpringerOpen |
publishDate |
2023 |
url |
http://psasir.upm.edu.my/id/eprint/108776/1/Proximal%20linearized%20method%20for%20sparse%20equity.pdf http://psasir.upm.edu.my/id/eprint/108776/ https://journalofinequalitiesandapplications.springeropen.com/articles/10.1186/s13660-023-03055-4 |
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