A semiparametric graphical modelling approach for large-scale equity selection.
We propose a new stock selection strategy that exploits rebalancing returns and improves portfolio performance. To effectively harvest rebalancing gains, we apply ideas from elliptical-copula graphical modelling and stability inference to select stocks that are as independent as possible. The proposed elliptical-copula graphical model has a latent Gaussian representation; its structure can be effectively inferred using the regularized rank-based estimators. The resulting algorithm is computationally efficient and scales to large data-sets. To show the efficacy of the proposed method, we apply it to conduct equity selection based on a 16-year health care stock data-set and a large 34-year stock data-set. Empirical tests show that the proposed method is superior to alternative strategies including a principal component analysis-based approach and the classical Markowitz strategy based on the traditional buy-and-hold assumption.
Department of Operations Research and Financial Engineering, Princeton University, Princeton, NJ 08544, USA.
Han
H
Liu
Department of Operations Research and Financial Engineering, Princeton University, Princeton, NJ 08544, USA.
John
J
Mulvey
Department of Operations Research and Financial Engineering, Princeton University, Princeton, NJ 08544, USA.
Tianqi
T
Zhao
Elliptical copula; Equity selection; Graphical model; Machine learning; Markowitz strategy; Rebalancing gains; Semiparametric methods; Stability selection