"KLICing" there and back again: Portfolio selection using the empirical likelihood divergence and Hellinger distance
AbstractStutzer (2000, 2003) proposes the decay-rate maximizing portfolio selection rule wherein the investor selects the asset mix that maximizes the rate at which the probability of shortfall decays to zero. A close examination of this rule reveals that it ranks portfolios by computing the divergence, in the Kullback-Leibler sense, between the unweighted portfolio return distribution and a tilted distribution meaned at the predetermined target or benchmark rate of return selected by or imposed upon the investor. This result implies, in the IID case, that Stutzer's rules can be written as a benchmark constrained Kullback-Leibler-based optimization problem with an endogenous utility interpretation. Here we expand on this idea by introducing two closely related portfolio selection rules based on the empirical likelihood divergence and the Hellinger-Matusita distance. The first of these is the reversed Kullback-Leibler divergence and the second is proportional to the average of the two divergences. The theoretical and in-sample properties of the new criteria suggest them to be competitive with and in some cases better than existing methods, especially in terms of skewness preference.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 18 (2011)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jempfin
Portfolio selection Skewness Entropy Shortfall Endogenous utility;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- M. Ryan Haley & Charles Whiteman, 2008. "Generalized Safety First and a New Twist on Portfolio Performance," Econometric Reviews, Taylor and Francis Journals, vol. 27(4-6), pages 457-483.
- Stutzer, Michael, 2003. "Portfolio choice with endogenous utility: a large deviations approach," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 365-386.
- Benartzi, Shlomo & Thaler, Richard H, 1995.
"Myopic Loss Aversion and the Equity Premium Puzzle,"
The Quarterly Journal of Economics,
MIT Press, vol. 110(1), pages 73-92, February.
- Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
- Rabin, Matthew, 1997.
"Psychology and Economics,"
Department of Economics, Working Paper Series
qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Fred Hanssmann, 1968. "Probability of Survival as an Investment Criterion," Management Science, INFORMS, vol. 15(1), pages 33-48, September.
- Stutzer, Michael, 1996. " A Simple Nonparametric Approach to Derivative Security Valuation," Journal of Finance, American Finance Association, vol. 51(5), pages 1633-52, December.
- Levy, Haim & Sarnat, Marshall, 1972. "Safety First — An Expected Utility Principle," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(03), pages 1829-1834, June.
- William J. Baumol, 1963. "An Expected Gain-Confidence Limit Criterion for Portfolio Selection," Management Science, INFORMS, vol. 10(1), pages 174-182, October.
- Walker, Todd B & Haley, M. Ryan, 2009. "Alternative Tilts for Nonparametric Option Pricing," MPRA Paper 17140, University Library of Munich, Germany.
- Haley, M. Ryan & McGee, M. Kevin, 2006. "Tilting safety first and the Sharpe portfolio," Finance Research Letters, Elsevier, vol. 3(3), pages 173-180, September.
- C. W. Granger & E. Maasoumi & J. Racine, 2004. "A Dependence Metric for Possibly Nonlinear Processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 25(5), pages 649-669, 09.
- Bawa, Vijay S., 1978. "Safety-First, Stochastic Dominance, and Optimal Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(02), pages 255-271, June.
- Bawa, Vijay S, 1976. "Admissible Portfolios for All Individuals," Journal of Finance, American Finance Association, vol. 31(4), pages 1169-83, September.
- John C. Robertson & Ellis W. Tallman & Charles H. Whiteman, 2002.
"Forecasting using relative entropy,"
2002-22, Federal Reserve Bank of Atlanta.
- Basu, Ayanendranath & Park, Chanseok & Lindsay, Bruce G. & Li, Haihong, 2004. "Some variants of minimum disparity estimation," Computational Statistics & Data Analysis, Elsevier, vol. 45(4), pages 741-763, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.