Chapter 6 Penalized regressions and sparse hedgin…

Salvo no Dropbox • 15 de abr de 2020 21:56

! " &  % $ 

Chapter 6 Penalized
regressions and sparse
hedging for minimum
variance portfolios
In this chapter, we introduce the widespread
concept of regularisation for linear models. There
are in fact several possible applications for these
models. The first one is straightforward: resort to
penalizations to improve the robustness of factor-
based predictive regressions. The outcome can
then be used to fuel an allocation scheme. For
instance, Han et al. (2019) and Rapach and Zhou
(2019) use penalized regressions to improve stock
return prediction when combining forecasts that
emanate from individual characteristics.

Similar ideas can be developed for macroeconomic