Seminar: "Sparse spanning portfolios and under-diversification with second-order stochastic dominance"

AUEB STATISTICS SEMINAR SERIES 2024-2025

Presenter: Stelios Arvanitis, Professor, Department of Economics, AUEB

Sparse spanning portfolios and under-diversification with second-order stochastic dominance

ROOMΤ107

ABSTRACT

We develop 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 asymptotically whether spanning holds or not. From large equity datasets, we estimate the expected utility loss due to under-diversification. There is no benefit, statistically or economically, from expanding beyond 45 assets. The optimal portfolio cuts tail risk vis-\`a-vis a sparse mean-variance portfolio. On rolling windows, the number of assets shrinks to 25 assets in crisis periods.