Minimum Risk Portfolios Using MMAR

MCBE'09 Proceedings of the 10th WSEAS International Conference on Mathematics and Computers in Business and Economics

8 Pages Posted: 18 Jul 2011

See all articles by Alexandre Pantanella

Alexandre Pantanella

University of Cassino

Augusto Pianese

affiliation not provided to SSRN

Date Written: June 3, 2009

Abstract

In traditional portfolio optimization the aim is to construct a portfolio of assets which simultaneously optimize a blend of high return and small risk. Within the classical Markowitz model, the efficient frontier identifies the set of portfolios that a rational investor considers according to his degree of risk aversion. The basic assumption of the standard theory is that asset returns are multivariate normal, what is shown to be inconsistent with empirical evidence by a growing number of studies, which devote a particular emphasis on the role played by the variance as a measure of risk. In order to improve the portfolio selection, we suggest to model the asset price dynamics by a multifractal stochastic process. The empirical analysis concerned a selection of major assets of the U.S. market and the European market. In both cases the proposed methodology shows considerable improvements of performance on the holding periods of one, two, three, six and twelve months.

Keywords: multifractal model of asset returns, portfolio’s selection, Hurst’s exponent, risk measure, Sharpe ratio

JEL Classification: C22, G11

Suggested Citation

Pantanella, Alexandre and Pianese, Augusto, Minimum Risk Portfolios Using MMAR (June 3, 2009). MCBE'09 Proceedings of the 10th WSEAS International Conference on Mathematics and Computers in Business and Economics, Available at SSRN: https://ssrn.com/abstract=1888216

Alexandre Pantanella (Contact Author)

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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