New characteristics for portfolio surveillance

Abstract

This paper elaborates the tools for the surveillance of the global minimum variance portfolio weights. Golosnoy and Schmid [V. Golosnoy and W. Schmid, EWMA control charts for optimal portfolio weights, Sequential Anal. 26 (2007), pp. 195–224] introduced exponentially weighted moving average-type control charts for this task based on the processes of the estimated weights as well as of their first differences. This paper proposes the new approximations to these processes exhibiting better stochastic properties for sequential monitoring purposes. The control schemes for the new processes are compared for different types of economically relevant changes using Monte Carlo simulations. The suggested procedures appear to be superior for the considered performance measures.

Keywords:

• statistical process control
• EWMA control charts
• multivariate normal distribution
• optimal portfolio weights
• volatility timing

Subject Classifications :

• 62L10
• 62P05
• 91B28

Acknowledgements

The authors express their gratitude to the two anonymous referees and the editor for the helpful suggestions, which lead to the significant improvement of the article. Special thanks are addressed to Marianne Frisén and Gerd Hansen for the valuable comments and discussions. Vasyl Golosnoy and Wolfgang Schmid thank German Research Society (DFG) for the financial support within the project ‘Sequenzielle U¨berwachung von optimalen Portfoliogewichten’. Iryna Okhrin is grateful to the Stiftungsfond Deutsche Bank for the financial support.