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Deformed exponentials and portfolio selection

Author

Listed:
  • Ana Flávia P. Rodrigues

    (Teleinformatics Engineering Department, Federal University of Ceará, Campus do Pici, Bloco 722, CP 6005, Fortaleza, Ceará 60440-900, Brazil)

  • Igor M. Guerreiro

    (Teleinformatics Engineering Department, Federal University of Ceará, Campus do Pici, Bloco 722, CP 6005, Fortaleza, Ceará 60440-900, Brazil)

  • Charles Casimiro Cavalcante

    (Teleinformatics Engineering Department, Federal University of Ceará, Campus do Pici, Bloco 722, CP 6005, Fortaleza, Ceará 60440-900, Brazil)

Abstract

In this paper, we present a method for portfolio selection based on the consideration on deformed exponentials in order to generalize the methods based on the gaussianity of the returns in portfolio, such as the Markowitz model. The proposed method generalizes the idea of optimizing mean-variance and mean-divergence models and allows a more accurate behavior for situations where heavy-tails distributions are necessary to describe the returns in a given time instant, such as those observed in economic crises. Numerical results show the proposed method outperforms the Markowitz portfolio for the cumulated returns with a good convergence rate of the weights for the assets which are searched by means of a natural gradient algorithm.

Suggested Citation

  • Ana Flávia P. Rodrigues & Igor M. Guerreiro & Charles Casimiro Cavalcante, 2018. "Deformed exponentials and portfolio selection," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 29(03), pages 1-17, March.
    • Handle: RePEc:wsi:ijmpcx:v:29:y:2018:i:03:n:s0129183118500298
    DOI: 10.1142/S0129183118500298
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    References listed on IDEAS

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    1. Back, Kerry, 2010. "Asset Pricing and Portfolio Choice Theory," OUP Catalogue, Oxford University Press, number 9780195380613, Decembrie.
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    Cited by:

    1. Vigelis, Rui F. & de Andrade, Luiza H.F. & Cavalcante, Charles C., 2020. "Conditions for the existence of a generalization of Rényi divergence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 558(C).
    2. Rodrigues, Ana Flávia P. & Cavalcante, Charles C. & Crisóstomo, Vicente L., 2019. "A projection pricing model for non-Gaussian financial returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 534(C).

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