Optimal Portfolio Diversification via Independent Component Analysis

• 成果类型: Article
• 署名作者: Lassance, Nathan; DeMiguel, Victor; Vrins, Frederic
• 署名单位: University of London; London Business School
• 刊物名称: OPERATIONS RESEARCH
• ISSN/ISSBN: 0030-364X
• DOI: 10.1287/opre.2021.2140
• 发表日期: 2022
• 页码: 55-72
• 关键词: value-at-risk; NAIVE DIVERSIFICATION; skewness portfolio; asset allocation; robust; performance; selection; optimization; constraints; MARKETS

摘要

A natural approach to enhance portfolio diversification is to rely on factor-risk parity, which yields the portfolio whose risk is equally spread among a set of uncorrelated factors. The standard choice is to take the variance as risk measure, and the principal components (PCs) of asset returns as factors. Although PCs are unique and useful for dimension reduction, they are an arbitrary choice: any rotation of the PCs results in uncorrelated factors. This is problematic becausewe demonstrate that any portfolio is a factor-variance-parity portfolio for some rotation of the PCs. More importantly, choosing the PCs does not account for the higher moments of asset returns. To overcome these issues, we propose using the independent components (ICs) as factors, which are the rotation of the PCs that are maximally independent, and care about higher moments of asset returns. We demonstrate that using the IC-variance-parity portfolio helps to reduce the return kurtosis. We also show how to exploit the near independence of the ICs to parsimoniously estimate the factor-risk-parity portfolio based on value at risk. Finally, we empirically demonstrate that portfolios based on ICs outperformthose based on PCs, and several state-of-the-art benchmarks.