An adaptive ADMM with regularized spectral penalty for sparse portfolio selection

Xin Xu

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arXiv · 2503.06185

An adaptive ADMM with regularized spectral penalty for sparse portfolio selection

Xin Xu

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Abstract

The mean-variance (MV) model is the core of modern portfolio theory. Nevertheless, it suffers from the over-fitting problem due to the estimation errors of model parameters. We consider the $\ell_{1}$ regularized MV model, which adds an $\ell_{1}$ regularization term in the objective to prevent over-fitting and promote sparsity of solutions. By investigating the relationship between sample size and over-fitting, we propose an initial regularization parameter scheme in the $\ell_{1}$ regularized MV model. Then we propose an adaptive parameter tuning strategy to control the amount of short sales. ADMM is a well established algorithm whose performance is affected by the penalty parameter. In this paper, a penalty parameter scheme based on regularized Barzilai-Borwein step size is proposed, and the modified ADMM is used to solve the $\ell_{1}$ regularized MV problem. Numerical results verify the effectiveness of the two types of parameters proposed in this paper.

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BibTeX RIS

Xin Xu. 2025-03-08. An adaptive ADMM with regularized spectral penalty for sparse portfolio selection. https://arxiv.org/abs/2503.06185

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