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Determination the Parameters of Markowitz Portfolio Optimization Model

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  • Ertugrul Bayraktar
  • Ayse Humeyra Bilge
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    Abstract

    The main purpose of this study is the determination of the optimal length of the historical data for the estimation of statistical parameters in Markowitz Portfolio Optimization. We present a trading simulation using Markowitz method, for a portfolio consisting of foreign currency exchange rates and selected assets from the Istanbul Stock Exchange ISE 30, over the period 2001-2009. In the simulation, the expected returns and the covariance matrix are computed from historical data observed for past n days and the target returns are chosen as multiples of the return of the market index. The trading strategy is to buy a stock if the simulation resulted in a feasible solution and sell the stock after exactly m days, independently from the market conditions. The actual returns are computed for n and m being equal to 21, 42, 63, 84 and 105 days and we have seen that the best return is obtained when the observation period is 2 or 3 times the investment period.

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    File URL: http://arxiv.org/pdf/1210.5859
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    Paper provided by arXiv.org in its series Papers with number 1210.5859.

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    Date of creation: Oct 2012
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    Handle: RePEc:arx:papers:1210.5859

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    Web page: http://arxiv.org/

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    1. repec:oup:jfinec:v:10:y:2012:i:1:p:164-197 is not listed on IDEAS
    2. Bertille Antoine, 2010. "Portfolio Selection with Estimation Risk: A Test-Based Approach," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(1), pages 164-197, 2012 10 1.
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