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Conditional Mean-Variance and Mean-Semivariance models in portfolio optimization

Author

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  • Hanene Ben Salah

    (IMAG - Institut Montpelliérain Alexander Grothendieck - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique, Laboratoire BESTMOD ISG Tunis - ISG Tunis, SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Ali Gannoun

    (IMAG - Institut Montpelliérain Alexander Grothendieck - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique)

  • Mathieu Ribatet

    (IMAG - Institut Montpelliérain Alexander Grothendieck - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper, we consider the problem of portfolio optimization. The risk will be measured by conditional variance or semivariance. It is known that the historical returns used to estimate expected ones provide poor guides to future returns. Consequently, the optimal portfolio asset weights are extremely sensitive to the return assumptions used. Getting informations about the future evolution of different asset returns, could help the investors to obtain more efficient portfolio. The solution will be reached under conditional mean estimation and prediction. This strategy allows us to take advantage from returns prediction which will be obtained by nonparametric univariate methods. Prediction step uses kernel estimation of conditional mean. Application on Chinese and American markets are presented and discussed.

Suggested Citation

  • Hanene Ben Salah & Ali Gannoun & Mathieu Ribatet, 2016. "Conditional Mean-Variance and Mean-Semivariance models in portfolio optimization," Working Papers hal-01299566, HAL.
    • Handle: RePEc:hal:wpaper:hal-01299566
    Note: View the original document on HAL open archive server: https://hal.science/hal-01299566
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    References listed on IDEAS

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    1. Arditti, Fred D., 1971. "Another Look at Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(3), pages 909-912, June.
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    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. Christian de Peretti, 2015. "A New Approach in Nonparametric Estimation of Returns in Mean-Downside Risk Portfolio frontier," Post-Print hal-02095499, HAL.
    5. Moshe Levy & Richard Roll, 2010. "The Market Portfolio May Be Mean/Variance Efficient After All," The Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2464-2491, June.
    6. Chunhachinda, Pornchai & Dandapani, Krishnan & Hamid, Shahid & Prakash, Arun J., 1997. "Portfolio selection and skewness: Evidence from international stock markets," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 143-167, February.
    7. Javier Estrada, 2004. "Mean-Semivariance Behaviour: An Alternative Behavioural Model," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(3), pages 231-248, December.
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    Cited by:

    1. Ruili Sun & Tiefeng Ma & Shuangzhe Liu & Milind Sathye, 2019. "Improved Covariance Matrix Estimation for Portfolio Risk Measurement: A Review," JRFM, MDPI, vol. 12(1), pages 1-34, March.

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