IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789814407519_0006.html
   My bibliography  Save this book chapter

Dynamic Portfolio Optimization under Regime-Based Firm Strength

In: Stochastic Programming Applications in Finance, Energy, Planning and Logistics

Author

Listed:
  • Chanaka Edirisinghe

    (College of Business, Austin Peay State University, Clarksville, TN 37044, USA)

  • Xin Zhang

    (College of Business, University of Tennessee, Knoxville, TN 37996, USA)

Abstract

This chapter presents a dynamic optimization model under regime-switching market uncertainty to manage stock portfolios. The novelty of the approach is that stocks for long and short investments are selected based on the notion of fundamental business strength and consistent with specific regime scenarios. Firm-strength is determined via the quarterly financial statements of a firm, relative to other firms in the same market sector/industry. Referred to as Relative Firm Strength (RFS), it is determined using Data Envelopment Analysis (DEA) in which various financial metrics from accounting statements are specified as inputs and outputs. It is shown that such an RFS measure has predictive power of stock returns in the historical data period 1971–2010. The regime-switching market model is combined with the RFS metric of stock selections to test the performance of a two-quarter stochastic portfolio optimization model during Jan–Jun, 2011. The out-of-sample results demonstrate that the proposed methodology is superior to using sector-based ETF portfolios or the market index itself.

Suggested Citation

  • Chanaka Edirisinghe & Xin Zhang, 2013. "Dynamic Portfolio Optimization under Regime-Based Firm Strength," World Scientific Book Chapters, in: Horand I Gassmann & William T Ziemba (ed.), Stochastic Programming Applications in Finance, Energy, Planning and Logistics, chapter 6, pages 129-154, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407519_0006
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789814407519_0006
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789814407519_0006
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789814407519_0006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.