Using Investment Portfolio Return to Combine Forecasts: A Multi-Objective Approach

35 Pages Posted: 21 Nov 2000

See all articles by Mark T. Leung

Mark T. Leung

University of Texas at San Antonio - Department of Management Science and Statistics

Hazem Daouk

Cornell University - School of Applied Economics and Management

An-Sing Chen

National Chung Cheng University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

This study investigates the usefulness and efficacy of a multiobjective decision method for financial trading guided by a set of seemingly diverse analysts' forecasts. The paper proposes a goal programming (GP) approach which combines various forecasts based on the performance of their previous investment returns. In our experiment, several series of financial analysts' forecasts are generated by different forecasting techniques. Investment returns on each series of forecasts are measured and then evaluated by three performance criteria, namely, mean, variance, and skewness. Subsequently, these distributional properties of the returns are used to construct a GP model. Results of the GP model provide a set of weights to compose an investment portfolio using various forecasts. To examine its practicality, the approach is tested on several major stock market indices. The performance of the proposed GP approach is compared with those of individual forecasting techniques and a number of forecast combination models suggested by previous studies. This comparison is conducted with respect to different levels of investor preference over return, variance, and skewness. Statistical significance of the results are accessed by bootstrap re-sampling. Empirical results indicate that, for all examined investor preference functions and market indices, the GP approach is significantly better than all other models tested in this study.

Keywords: Investment analysis, neural networks, econometric forecasting, goal programming, combining forecasts, multiobjective decision analysis

JEL Classification: C22, C35, C45, C61, G11

Suggested Citation

Leung, Mark T. and Daouk, Hazem and Chen, An-Sing, Using Investment Portfolio Return to Combine Forecasts: A Multi-Objective Approach (July 2001). Available at SSRN: https://ssrn.com/abstract=245549 or http://dx.doi.org/10.2139/ssrn.245549

Mark T. Leung

University of Texas at San Antonio - Department of Management Science and Statistics ( email )

San Antonio, TX
United States

Hazem Daouk (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

446 Warren Hall
Ithaca, NY 14853
United States
331-45-78-63-88 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/hd35/

An-Sing Chen

National Chung Cheng University - Department of Finance ( email )

Chia-Yi, Taiwan 621
China
+011 886 5 272 0411 (Phone)
+011 886 5 272 0818 (Fax)

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