Financial Portfolio Selection in a Nonstationary Gaussian Framework

The Role of the University in the Analysis of Current Economic Crisis - Spiru Haret University, Bucharest: România de Mâine Publishing House, Vol. 1, pp. 619-627, May 28, 2009

9 Pages Posted: 18 Jul 2011

See all articles by Sergio Bianchi

Sergio Bianchi

University of Cassino

Alexandre Pantanella

University of Cassino

Augusto Pianese

affiliation not provided to SSRN

Abstract

We introduce the selection of financial portfolios in a nonstationary Gaussian framework that assumes the price process to be modeled by a multifractional Brownian motion (mBm). This process captures the time-changing regularity of the sample paths as a result of the impact of the new information on markets. The key variable is the pointwise H¨older exponent, H(t), which summarizes the level of regularity at a given point along the trajectories of the process. Therefore, the exponent H(t) can be viewed as a local (instantaneous) indicator of risk. By the exponents of the individual assets, we derive in closed form the pointwise Hoelder exponent of a portfolio and stress the analogies with the classical Markowitz result. Furthermore, we compare the composition of the efficient frontier defined using the new risk measure with respect to Markowitz’s one, obtained in the last quarter of the year 2008, a period characterized by a deep financial crisis and unusual movements for the stock prices.

Keywords: multifractional Brownian motion, portfolio’s selection, Hurst exponent

JEL Classification: C13, C22, G11

Suggested Citation

Bianchi, Sergio and Pantanella, Alexandre and Pianese, Augusto, Financial Portfolio Selection in a Nonstationary Gaussian Framework. The Role of the University in the Analysis of Current Economic Crisis - Spiru Haret University, Bucharest: România de Mâine Publishing House, Vol. 1, pp. 619-627, May 28, 2009, Available at SSRN: https://ssrn.com/abstract=1888181

Sergio Bianchi (Contact Author)

University of Cassino ( email )

Via S. Angelo - Campus Folcara
Dept. of Economics and Law
Cassino, 03043
Italy
+3907762994846 (Phone)
+390776393034 (Fax)

HOME PAGE: http://www.docente.unicas.it/sergio_bianchi

Alexandre Pantanella

University of Cassino ( email )

Via S. Angelo, Loc. Folcara
Cassino, Frosinone 03043
Italy

Augusto Pianese

affiliation not provided to SSRN ( email )

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