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Portfolios Optimizations of Behavioral Stocks with Perception Probability Weightings

Author

Listed:
  • Kuo-Hwa Chang

    (Department of Industrial and Systems Engineering, Chung Yuan Christian University)

  • Michael Nayat Young

    (Department of Industrial and Systems Engineering, Chung Yuan Christian University
    Department of Industrial Engineering and Engineering Management, Mapua University)

Abstract

Having traceable stock price movements and predictable market trends can always benefit investors. Considering specific irrational investor behaviors that may collectively affect a stock's price movement, we identified the cause-and-effect return patterns of affected stocks (behavioral-stocks) with their corresponding time-to-effects and likelihood-of-effects. Considering different individual investor perceptions on future market performances, we transformed investor perceptions into probability weights on future market performances, wherein the weights are also consistent with the estimated likelihood-of-effects of behavioral-stocks. Utilizing a scenario-based mixed-integer behavioral-stocks portfolio optimization program embedded with a new two-dimensional weightings on scenarios and behavioral-stocks, we obtained portfolios that statistically outperform the market.

Suggested Citation

  • Kuo-Hwa Chang & Michael Nayat Young, 2019. "Portfolios Optimizations of Behavioral Stocks with Perception Probability Weightings," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 817-845, November.
    • Handle: RePEc:cuf:journl:y:2019:v:20:i:2:changyoung
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    More about this item

    Keywords

    Portfolio management; Behavioral portfolio optimization; Irrational behaviors; Probability weightings; Mixed integer program;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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