A Behavioural Approach to Efficient Portfolio Formation

21 Pages Posted: 8 Jun 2002

See all articles by Yaz Gulnur Muradoglu

Yaz Gulnur Muradoglu

Queen Mary University of London; City University London - Sir John Cass Business School

Aslihan Altay Salih

Bilkent University - Faculty of Business Administration

Muhammet Mercan

Yapi Kredi Yatirim - Research Department

Abstract

In this paper we investigate the portfolio performance of subjective forecasts given in different forms. In constructing the efficient frontier, the expectation formation processes based is on subjective forecasts and human behaviour, rather than past prices. The efficient portfolios are first constructed using point, interval and probabilistic forecasts. Next their performance is compared to those constructed using the standard approach of time series data. The subjective forecast are given by actual portfolio managers who forecast the prices of stocks actually traded on the stock exchange on a real time basis. The first contribution of the paper is to show that the portfolio performance of subjective forecasts are much more superior to those of standard time series modeling. The next contribution of the paper lies in the fact that it employs experts, professional fund managers with substantive expertise, as forecasters. Third, in this research, point, interval and probabilistic forecasts of expert subjects are investigated and therefore, findings are robust to the task format.

Keywords: Behavioural finance, subjective forecasts, efficient, portfolio

JEL Classification: C91, G11, G19

Suggested Citation

Muradoglu, Yaz Gulnur and Salih, Aslihan Altay and Mercan, Muhammet, A Behavioural Approach to Efficient Portfolio Formation. EFMA 2002 London Meetings; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=313982 or http://dx.doi.org/10.2139/ssrn.313982

Yaz Gulnur Muradoglu (Contact Author)

Queen Mary University of London ( email )

Francis Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 0124 (Phone)
+44 20 7040 8853 (Fax)

Aslihan Altay Salih

Bilkent University - Faculty of Business Administration ( email )

06533 Bilkent, Ankara
Turkey

HOME PAGE: http://www.bilkent.edu.tr/~asalih

Muhammet Mercan

Yapi Kredi Yatirim - Research Department ( email )

11th floor, Levent
80620 Istanbul
Turkey
+90-212-284 19 32 (Phone)

HOME PAGE: http://mese.caltech.edu/~bfl/members/private/12.html

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