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Evaluation of Effectiveness of Arima Model Predictions in Investment Portfolio Formation and Management

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  • Brolinska Iryna

    (Vilnius Gediminas Technical University, Vilnius, Lithuania)

  • Žilinskij Grigorij

    (Vilnius Gediminas Technical University, Vilnius, Lithuania)

Abstract

Research purpose. The increasing array of financial assets and investment opportunities nowadays is making investors consider new ways of investment portfolio formation and management. Many choose to take advantage of a wide variety of forecasting models in order to enhance investment portfolio performance results. However, each forecasting model has its application peculiarities, strengths, weaknesses and distinctive features. This paper offers a methodological basis and evaluation of the application of the ARIMA forecasting model in investment portfolio formation and management. The purpose of the research is to evaluate the effectiveness of ARIMA model predictions in investment portfolio creation and management. Design / Methodology / Approach. The period of two years, from May 2023 to April 2025, was chosen as the interval for conducting this research. The dataset for this experiment comprised five years of monthly securities prices, therefore the ARIMA model application and reinvestment occurred on a monthly basis. For an accurate evaluation of the ARIMA model-based investment portfolio, it has been compared with an ordinary mean-variance investment portfolio which has been created and managed in the same way. Additionally, the accuracy of the forecasts and their influence on portfolio performance has been evaluated. Findings. The findings of this study suggest that, given the monthly reinvestment and securities chosen, the implementation of the ARIMA model in investment portfolios is not recommended. This conclusion is based on the relatively low performance of the portfolio and the significant time and effort required to implement the ARIMA model, leading to its inefficiency. Originality / Value / Practical implications. The practical implications of this study suggest that investors should consider alternative forecasting models, different trading frequencies, or other financial assets to achieve better results. If investors opt to implement the ARIMA model for investment portfolio formation and management, it is important to note that the forecasts have shown to be accurate for short-term predictions, particularly in securities with strong trends and low-price volatility.

Suggested Citation

  • Brolinska Iryna & Žilinskij Grigorij, 2025. "Evaluation of Effectiveness of Arima Model Predictions in Investment Portfolio Formation and Management," Economics and Culture, Sciendo, vol. 22(1), pages 108-122.
    • Handle: RePEc:vrs:ecocul:v:22:y:2025:i:1:p:108-122:n:1009
    DOI: 10.2478/jec-2025-0009
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    References listed on IDEAS

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    1. Cláudia Duarte & Fátima Cardoso, 2006. "The Use of Qualitative Information for Forecasting Exports," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    2. repec:ptu:bdpart:b200615 is not listed on IDEAS
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      JEL classification:

      • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
      • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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