Cumulative Prospect Theory Portfolio Selection

14 Pages Posted: 12 Jan 2021

See all articles by Diana Barro

Diana Barro

Ca Foscari University of Venice - Dipartimento di Economia; SSAV

Marco Corazza

Ca Foscari University of Venice - Dipartimento di Economia

Martina Nardon

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: December 31, 2020

Abstract

We introduce elements of Cumulative Prospect Theory into the portfolio selection problem and then compare stock portfolios selected under the behavioral approach with those selected according to classical approaches, such as Mean Variance and Mean Absolute Deviation ones. The mathematical programming problem associated to the behavioral portfolio selection is highly non-linear and non-differentiable; for these reasons it is solved using a Particle Swarm Optimization approach. An application to the STOXX Europe 600 equity market is performed.

Keywords: Cumulative Prospect Theory, Portfolio Selection, Particle Swarm Optimization

JEL Classification: G40, G11, C61

Suggested Citation

Barro, Diana and Corazza, Marco and Nardon, Martina, Cumulative Prospect Theory Portfolio Selection (December 31, 2020). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 26/WP/2020, Available at SSRN: https://ssrn.com/abstract=3764530 or http://dx.doi.org/10.2139/ssrn.3764530

Diana Barro

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

SSAV ( email )

Venice
Italy

Marco Corazza

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Martina Nardon (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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