Greedy Method for SMRPs (PART 2)

Implementing the greedy method for SMRPs with 2 new metrics

Introduction

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We recently explored the use of the Greedy algorithm for generating Sparse Mean Reverting Portfolios (SMRPs) using the Portmanteau criterion. In this article, we will expand a little on this method and look at 2 other metrics which take a slightly different perspective when optimizing. These two metrics are:

• Predictability (Box-Tiao Canonical Decomposition)

• Crossing Statistic

Code will be included so that you can test this out for yourself. I’ll also add some commentary on how these metrics can be useful when used together.