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Portfolio selection with conservative short-selling

Author

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  • Kim, Jang Ho
  • Kim, Woo Chang
  • Fabozzi, Frank J.

Abstract

Mean-variance analysis is considered the foundation of portfolio selection. Among various attempts to address the limitations of the original model as formulated by Markowitz more than 60 years ago, one simple solution has been to impose constraints on weights in order to reduce efficient portfolios with extreme weights that may be caused by estimation errors in the inputs. Although no short-selling constraints are often considered, the restriction removes opportunities to gain from short-selling and short positions provide various investment opportunities such as long/short strategies. In this paper we propose a portfolio selection model that allows short positions while examining the worst case only for assets that are assigned negative weights. The proposed model constructs portfolios with conservative short positions and the conservative level can be adjusted by the investor.

Suggested Citation

  • Kim, Jang Ho & Kim, Woo Chang & Fabozzi, Frank J., 2016. "Portfolio selection with conservative short-selling," Finance Research Letters, Elsevier, vol. 18(C), pages 363-369.
  • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:363-369
    DOI: 10.1016/j.frl.2016.05.015
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. Thomas J. Brennan & Andrew W. Lo, 2010. "Impossible Frontiers," Management Science, INFORMS, vol. 56(6), pages 905-923, June.
    3. Green, Richard C & Hollifield, Burton, 1992. " When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-1809, December.
    4. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
    5. Frank Fabozzi & Dashan Huang & Guofu Zhou, 2010. "Robust portfolios: contributions from operations research and finance," Annals of Operations Research, Springer, vol. 176(1), pages 191-220, April.
    6. Pedro A. C. Saffi & Kari Sigurdsson, 2011. "Price Efficiency and Short Selling," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 821-852.
    7. Levy, Haim, 1983. "The Capital Asset Pricing Model: Theory and Empiricism," Economic Journal, Royal Economic Society, vol. 93(369), pages 145-165, March.
    8. Behr, Patrick & Guettler, Andre & Miebs, Felix, 2013. "On portfolio optimization: Imposing the right constraints," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1232-1242.
    9. Yeh, Jin-Huei & Chen, Lien-Chuan, 2014. "Stabilizing the market with short sale constraint? New evidence from price jump activities," Finance Research Letters, Elsevier, vol. 11(3), pages 238-246.
    10. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1684, August.
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    Citations

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    Cited by:

    1. Chiu, Wan-Yi & Jiang, Ching-Hai, 2016. "On the weight sign of the global minimum variance portfolio," Finance Research Letters, Elsevier, vol. 19(C), pages 241-246.

    More about this item

    Keywords

    Mean-variance portfolio selection; No short-selling constraint; Conservative short positions;

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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