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Autor:innen: 
Erscheinungsjahr: 
2025
Schriftenreihe/Nr.: 
Queen’s Economics Department Working Paper No. 1526
Verlag: 
Queen's University, Department of Economics, Kingston (Ontario)
Zusammenfassung: 
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 45 assets. The optimal sparse portfolio invests in 10 industry sectors and cuts tail risk when compared to a sparse mean-variance portfolio. On a rolling-window basis, the number of assets shrinks to 25 assets in crisis periods, while standard factor models cannot explain the performance of the sparse portfolios.
Schlagwörter: 
Nonparametric estimation
stochastic dominance
spanning
under-diversification
greedy algorithm
Linear Programming
JEL: 
C13
C14
C44
C58
C61
D81
G11
Dokumentart: 
Working Paper

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