portfolio optimization-autocorrelation in asset returns
Does the smoothing parameter of your covariance matrix affect the results substantially? You might also try 'factor.model.stat' that is available in the Public Domain area of http://www.burns-stat.com Though it is somewhat out of character for me to discourage minimum variance portfolios, perhaps you want to include a prediction of the returns in your optimization. Patrick Burns patrick at burns-stat.com +44 (0)20 8525 0696 http://www.burns-stat.com (home of S Poetry and "A Guide for the Unwilling S User")
Alexander Moreno wrote:
Hi, I'm running a Markowitz Optimization using an EWMA correlation forecast and weekly data to find the minimum variance portfolios, updated every week, for a basket of currencies. I'm finding that the performance is somewhat wanting, but when I remove currencies with significant positive autocorrelation over the sample, the performance over the same sample improves substantially (I know, my description is somewhat vague and this is also cheating). However, I believe this is due to autocorrelation violating assumptions in the Markowitz Optimization framework, and I'm wondering if anyone could point me towards the best ways to get around this problem that don't involve looking at the autocorrelation over a sample and then removing the currency from the optimization for the same sample. Thanks, Alex [[alternative HTML version deleted]]
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