On the weight sign of the global minimum variance portfolio

• Published in: Finance research letters Vol. 19; pp. 241 - 246
• Main Authors: Chiu, Wan-Yi, Jiang, Ching-Hai
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.11.2016
• Subjects: Global minimum variance portfolio; Inverse covariance matrix; Modified information ratio; Regression hedge; Modified information ratio; Regression hedge; Inverse covariance matrix; Global minimum variance portfolio; G11; C58
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2016.08.008

•The regression hedge can accurately identify the GMVP weight sign.•The regression hedge effect determines the GMVP weight sign.•The higher modified information ratio yields a larger weight in the GMVP. We investigate the one-to-one mapping between the global minimum variance portfolio and regression hedge coefficients. The analysis demonstrates that assets with a superior (inferior) regression hedged effect in terms of marginal return create a negative (positive) weight. The asset has a weight of zero when both the asset and regression hedge enjoy the same marginal return. In addition, we develop a modified information ratio to compare the magnitudes of two arbitrary weights of the global minimum variance portfolio. From the perspective of hedging, we determine that the asset with a higher modified information ratio yields a larger weight.