Robust Multi-Period Portfolio Model Based on Prospect Theory and ALMV-PSO Algorithm

35 Pages Posted: 20 Apr 2015

See all articles by Jiahe Liu

Jiahe Liu

Northeastern University, China - School of Business Administration

Xiu Jin

Northeastern University, China - School of Business Administration

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Ying Yuan

Northeastern University, China - School of Business Administration

Date Written: February 18, 2014

Abstract

The studies of behavioral finance show that the cognitive bias plays an important role in investors' decision-making process. In this paper, based on the robust theory and prospect theory, a robust multi-period portfolio considering investors' behavioral factors is constructed, which features the reference dependence, loss aversion and diminishing sensitivity. To solve the proposed portfolio model, an improved particle swarm optimization (PSO) algorithm is developed, which incorporates the two-stage initialization strategy, the improved stochastic ranking approach, the aging leader and the multi-frequency vibrational mutation operator. We illustrate the robust model with real market data and show its effectiveness based on the performance of the proposed algorithm. The results show that the proposed algorithm is successful in solving the constrained multi-period portfolio model and the proposed portfolio model provides an effective tool for a real multi-period investment.

Keywords: Finance; Portfolio selection; Prospect theory; Robust optimization; Multi- period portfolio; Particle swarm optimization

JEL Classification: G13

Suggested Citation

Liu, Jiahe and Jin, Xiu and Wang, Tianyang and Yuan, Ying, Robust Multi-Period Portfolio Model Based on Prospect Theory and ALMV-PSO Algorithm (February 18, 2014). Available at SSRN: https://ssrn.com/abstract=2398160 or http://dx.doi.org/10.2139/ssrn.2398160

Jiahe Liu

Northeastern University, China - School of Business Administration ( email )

Shenyang, 110004
China

Xiu Jin

Northeastern University, China - School of Business Administration ( email )

Shenyang, 110004
China

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

Ying Yuan

Northeastern University, China - School of Business Administration ( email )

Shenyang, 110004
China

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