On the Stability of Portfolio Selection Models

27 Pages Posted: 17 Jul 2019

See all articles by Francesco Cesarone

Francesco Cesarone

Rome Tre University - Department of Business Studies

Carlo Mottura

University of Rome III

Jacopo Maria Ricci

University of Rome III

Fabio Tardella

Faculty of Economics - Sapienza University of Rome

Date Written: September 18, 2018

Abstract

One of the main issues in portfolio selection models consists in assessing the effect of the estimation errors of the parameters required by the models on the quality of the selected portfolios. Several studies have been devoted to this topic for the minimum variance and for several other minimum risk models. However, no sensitivity analysis seems to have been reported for the recent popular Risk Parity diversification approach, nor for other portfolio selection models requiring maximum gain-risk ratios.

Based on artificial and real-world data, we provide here empirical evidence showing that the Risk Parity model is always the most stable one in all the cases analyzed. Furthermore, the minimum risk models are typically more stable than the maximum gain-risk models, with the minimum variance model often being the preferable one.

Keywords: risk parity, estimation errors, portfolio optimization, stability measures, gain-risk ratio

JEL Classification: C06, G01

Suggested Citation

Cesarone, Francesco and Mottura, Carlo and Ricci, Jacopo Maria and Tardella, Fabio, On the Stability of Portfolio Selection Models (September 18, 2018). Available at SSRN: https://ssrn.com/abstract=3420081 or http://dx.doi.org/10.2139/ssrn.3420081

Francesco Cesarone (Contact Author)

Rome Tre University - Department of Business Studies ( email )

Via Silvio D'Amico 77
Via Silvio D'Amico 77
Rome, TN RM 00145
Italy

HOME PAGE: http://host.uniroma3.it/docenti/cesarone/papers.htm

Carlo Mottura

University of Rome III ( email )

Via Ostiense, 159
Rome, RM 00145
Italy

Jacopo Maria Ricci

University of Rome III ( email )

Via Ostiense, 159
Rome, RM 00145
Italy

Fabio Tardella

Faculty of Economics - Sapienza University of Rome ( email )

Via del Castro Laurenziano, 9
Roma, Rome 00161
Italy

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