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EnglishOne of the main issues in portfolio selection models consists in assessing the effect of the estimation errors of the parameters required by the models on the quality of the selected portfolios. Several studies have been devoted to this topic for the minimum variance and for several other minimum risk models. However, no sensitivity analysis seems to have been reported for the recent popular Risk Parity diversification approach, nor for other portfolio selection models requiring maximum gain-risk ratios. Based on artificial and real-world data, we provide here empirical evidence showing that the Risk Parity model is always the most stable one in all the cases analyzed with respect to the portfolio composition. Furthermore, the minimum risk models are typically more stable than the maximum gain-risk models, with the minimum variance model often being the preferable one. The Risk Parity model seems to be the most stable one also with respect to profitability when measured by the Sharpe ratio. However, the maximum gain-risk models, although quite sensitive to the input data, generally appear to attain better profitability results.
On the stability of portfolio selection models / Cesarone, Francesco; Mango, Fabiomassimo; Mottura, Carlo Domenico; Tardella, Fabio; Maria Ricci, Jacopo. - In: JOURNAL OF EMPIRICAL FINANCE. - ISSN 0927-5398. - (2020), pp. 1-25. [10.1016/j.jempfin.2020.10.003]
| Titolo: | On the stability of portfolio selection models | |
| Data di pubblicazione: | 2020 | |
| Autori: | ||
| Stringa autori: | Cesarone, Francesco; Mango, Fabiomassimo; Mottura, Carlo Domenico; Tardella, Fabio; Maria Ricci, Jacopo | |
| Numero degli autori: | 5 | |
| Nazionalità autore: | ITALIA | |
| Lingua: | Inglese | |
| Rivista: | JOURNAL OF EMPIRICAL FINANCE | |
| Revisione (peer review): | Esperti anonimi | |
| Pagina iniziale: | 1 | |
| Pagina finale: | 25 | |
| Numero di pagine: | 25 | |
| Editore: | Elsevier B.V. | |
| Digital Object Identifier (DOI): | http://dx.doi.org/10.1016/j.jempfin.2020.10.003 | |
| Codice identificativo Scopus: | 2-s2.0-85095449634 | |
| Codice identificativo ISI: | WOS:000594531600011 | |
| Abstract: | One of the main issues in portfolio selection models consists in assessing the effect of the estimation errors of the parameters required by the models on the quality of the selected portfolios. Several studies have been devoted to this topic for the minimum variance and for several other minimum risk models. However, no sensitivity analysis seems to have been reported for the recent popular Risk Parity diversification approach, nor for other portfolio selection models requiring maximum gain-risk ratios. Based on artificial and real-world data, we provide here empirical evidence showing that the Risk Parity model is always the most stable one in all the cases analyzed with respect to the portfolio composition. Furthermore, the minimum risk models are typically more stable than the maximum gain-risk models, with the minimum variance model often being the preferable one. The Risk Parity model seems to be the most stable one also with respect to profitability when measured by the Sharpe ratio. However, the maximum gain-risk models, although quite sensitive to the input data, generally appear to attain better profitability results. | |
| Parole Chiave: | Risk Parity; Estimation errors; Portfolio optimization; Stability measures; Profitability analysis; Gain-risk ratio | |
| Appartiene alla tipologia: | 01a Articolo in rivista |
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| Cesarone_stability-portfolio-post-print_2020.pdf | Documento in Post-print (versione successiva alla peer review e accettata per la pubblicazione) | Tutti i diritti riservati (All rights reserved) | Administrator Richiedi una copia | |
| Cesarone_stability-portfolio_2020.pdf | Versione editoriale (versione pubblicata con il layout dell'editore) | Tutti i diritti riservati (All rights reserved) | Administrator Richiedi una copia |
http://hdl.handle.net/11573/1451700
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