On the non-stationarity of financial time series: impact on optimal portfolio selection
We investigate the possible drawbacks of employing the standard Pearson estimator to measure correlation coefficients between financial stocks in the presence of non-stationary behavior, and we provide empirical evidence against the well-established common knowledge that using longer price time series provides better, more accurate, correlation estimates. Then, we investigate the possible consequences of instabilities in empirical correlation coefficient measurements on optimal portfolio selection. We rely on previously published works which provide a framework allowing to take into account possible risk underestimations due to the non-optimality of the portfolio weights being used in order to distinguish such non-optimality effects from risk underestimations genuinely due to non-stationarities. We interpret such results in terms of instabilities in some spectral properties of portfolio correlation matrices.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael C. M\"unnix & Takashi Shimada & Rudi Sch\"afer & Francois Leyvraz Thomas H. Seligman & Thomas Guhr & H. E. Stanley, 2012. "Identifying States of a Financial Market," Papers 1202.1623, arXiv.org.
- Acerbi, Carlo & Tasche, Dirk, 2002.
"On the coherence of expected shortfall,"
Journal of Banking & Finance,
Elsevier, vol. 26(7), pages 1487-1503, July.
- Livan, Giacomo & Alfarano, Simone & Scalas, Enrico, 2011.
"The fine structure of spectral properties for random correlation matrices: an application to financial markets,"
28964, University Library of Munich, Germany.
- G. Livan & S. Alfarano & E. Scalas, 2011. "The fine structure of spectral properties for random correlation matrices: an application to financial markets," Papers 1102.4076, arXiv.org.
- Galluccio, Stefano & Bouchaud, Jean-Philippe & Potters, Marc, 1998.
"Rational decisions, random matrices and spin glasses,"
Physica A: Statistical Mechanics and its Applications,
Elsevier, vol. 259(3), pages 449-456.
- Stefano Galluccio & Jean-Philippe Bouchaud & Marc Potters, 1998. "Rational decisions, random matrices and spin glasses," Science & Finance (CFM) working paper archive 500054, Science & Finance, Capital Fund Management.
- Stefano Galluccio & Jean-Philippe Bouchaud & Marc Potters, 1998. "Rational Decisions, Random Matrices and Spin Glasses," Papers cond-mat/9801209, arXiv.org.
- Z. Burda & A. Görlich & J. Jurkiewicz & B. Wacław, 2006. "Correlated Wishart matrices and critical horizons," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 49(3), pages 319-323, 02.
- Burda, Z. & Görlich, A. & Jarosz, A. & Jurkiewicz, J., 2004. "Signal and noise in correlation matrix," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 343(C), pages 295-310.
- Szilard Pafka & Imre Kondor, 2002.
"Noisy Covariance Matrices and Portfolio Optimization II,"
cond-mat/0205119, arXiv.org, revised May 2002.
- Pafka, Szilárd & Kondor, Imre, 2003. "Noisy covariance matrices and portfolio optimization II," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 319(C), pages 487-494.
- Gabor Papp & Szilard Pafka & Maciej A. Nowak & Imre Kondor, 2005. "Random Matrix Filtering in Portfolio Optimization," Papers physics/0509235, arXiv.org.
- Giacomo Raffaelli & Matteo Marsili, 2005. "Dynamic instability in a phenomenological model of correlated assets," Papers physics/0508159, arXiv.org, revised Apr 2006.
- Imre Kondor & Szilard Pafka & Gabor Nagy, 2006.
"Noise sensitivity of portfolio selection under various risk measures,"
- Kondor, Imre & Pafka, Szilard & Nagy, Gabor, 2007. "Noise sensitivity of portfolio selection under various risk measures," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1545-1573, May.
- Marsili, Matteo & Raffaelli, Giacomo & Ponsot, Benedicte, 2009. "Dynamic instability in generic model of multi-assets markets," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1170-1181, May.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1205.0877. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.