Arvanitis, S. "Sparse spanning portfolios and under-diversification with second-order stochastic dominance"
Thursday, November 23, 2023
Title: "Sparse spanning portfolios and under-diversification with second-order stochastic dominance"
Speaker: Professor Stelios Arvanitis, Athens University of Economics and Business
Host: Assistant Professor Alexopoulos Angelos, Department of Economics, Athens University of Economics and Business
Time: 15.30 -17.00
Attachments: PDF of Relevant Paper
Abstact: We develop and implement methods for determining whether relaxing sparsity constraints on portfolios improves the investment opportunity set for risk-averse investors. We formulate a new estimation procedure for sparse second-order stochastic spanning based on a greedy algorithm and Linear Programming. We show the optimal recovery of the sparse solution asymptotically whether spanning holds or not. From large equity datasets, we estimate the expected utility loss due to possible under-diversification, and find that there is no benefit from expanding a sparse opportunity set beyond 30 assets. The optimal sparse portfolio invests in 10 industry sectors with a larger weighting on small size, high book-to-market, and momentum stocks from the S&P 500 index and cuts tail risk when compared to a sparse mean-variance portfolio. On a rolling-window basis, the number of assets shrinks to 10 assets in crisis periods.