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Mean-Variance Portfolio Optimization of Energy Stocks Supported with Second Order Stochastic Dominance Efficiency

Author

Listed:
  • Celal Barkan Guran

    () (Istanbul Technical University, Management Engineering Department, Macka, Besiktas, Istanbul, Turkey)

  • Umut Ugurlu

    () (Bahcesehir University, Faculty of Economics, Administrative and Social Sciences, Management Department, Besiktas, Istanbul, Turkey)

  • Oktay Tas

    () (Istanbul Technical University, Management Engineering Department, Macka, Besiktas, Istanbul, Turkey)

Abstract

Second order stochastic dominance pairwise efficiency could be considered as a milestone among the improvements, which eliminates the shortcomings of mean-variance theory. This paper applies mean-variance optimization on the global fossil fuels stocks, as a leading representative of energy sector, with the help of the pre-elimination of second order stochastic dominance pairwise inefficient stocks. The performance of the application is additionally measured with an out-of-sample back-testing analysis, which indicates a contribution to the existing literature; second order stochastic dominance pre-elimination method increases the success of some of the selected mean-variance optimized portfolios on the efficient frontier which stand out with a better back-testing performance.

Suggested Citation

  • Celal Barkan Guran & Umut Ugurlu & Oktay Tas, 2019. "Mean-Variance Portfolio Optimization of Energy Stocks Supported with Second Order Stochastic Dominance Efficiency," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(4), pages 366-383, August.
  • Handle: RePEc:fau:fauart:v:69:y:2019:i:4:p:366-383
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    File URL: http://journal.fsv.cuni.cz/mag/article/show/id/1442
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    More about this item

    Keywords

    different return-risk levels; fossil fuels energy stocks; mean-variance portfolio optimization; pairwise efficiency; second order stochastic dominance;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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