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Cumulative Prospect Theory portfolio selection

Author

Listed:
  • Diana Barro

    (Department of Economics, Ca' Foscari University of Venice)

  • Marco Corazza

    (Department of Economics, Ca' Foscari University of Venice)

  • Martina Nardon

    (Department of Economics, Ca' Foscari University of Venice)

Abstract

We introduce elements of Cumulative Prospect Theory into the portfolio selection problem and then compare stock portfolios selected under the behavioral approach with those selected according to classical approaches, such as Mean Variance and Mean Absolute Deviation ones. The mathematical programming problem associated to the behavioral portfolio selection is highly non-linear and non-differentiable; for these reasons it is solved using a Particle Swarm Optimization approach. An application to the STOXX Europe 600 equity market is performed.

Suggested Citation

  • Diana Barro & Marco Corazza & Martina Nardon, 2020. "Cumulative Prospect Theory portfolio selection," Working Papers 2020:26, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2020:26
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    File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers/2020/WP_DSE_barro_corazza_nardon_26_20.pdf
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    Citations

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    Cited by:

    1. Francesco Cesarone & Massimiliano Corradini & Lorenzo Lampariello & Jessica Riccioni, 2023. "A new behavioral model for portfolio selection using the Half-Full/Half-Empty approach," Papers 2312.10749, arXiv.org.

    More about this item

    Keywords

    Cumulative Prospect Theory; Portfolio Selection; Particle Swarm Optimization;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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