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Financial Markets and Portfolio Management

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21-07-2018

Behavioral portfolio selection and optimization: an application to international stocks

Authors: Beatrice D. Simo-Kengne, Kofi A. Ababio, Jules Mba, Ur Koumba

Published in: Financial Markets and Portfolio Management | Issue 3/2018

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Abstract

The behavioral approach of decision making has emerged as a diversified solution in the presence of risk and uncertainty. Using the popular cumulative prospect theory as an objective function for portfolio selection, this study implements the classical mean–variance model to compare the portfolio performance of high behavioral stocks with that of stocks with lower behavioral values. Based on a sample of 37 international stocks over the period from October 1998 to November 2017, empirical results from D-vine pair copula GARCH-GEV indicate that the portfolio of high behavioral prospect stocks outperforms the portfolio of stocks with low behavioral scores. This finding may suggest that portfolios with high behavioral values coincide with rational efficiency sets.

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The pair copula models include the canonical vine (C-vine), the drawable vine (D-vine) and the regular vine (R-vine).

The analysis focuses on the negative residuals as investors generally worry more about losses than gains. This is referred to as the “long position”.

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Title: Behavioral portfolio selection and optimization: an application to international stocks
Authors: Beatrice D. Simo-Kengne
Kofi A. Ababio
Jules Mba
Ur Koumba
Publication date: 21-07-2018
Publisher: Springer US
Published in: Financial Markets and Portfolio Management / Issue 3/2018
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-018-0313-8

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