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SECOND ORDER STOCHASTIC DOMINANCE EFFICIENCY ANALYSIS OF BORSA ISTANBUL

Year 2015, Volume: 2 Issue: 3, 0 - 0, 29.09.2015

Neslihan Fidan Kececi

Abstract

Markowitz mean-variance portfolio theory is one of the most widely used approaches in portfolio selection. Recently another possible approach have been developed showing that efficient portfolios can be found by solving stochastic dominance constrained portfolio optimization problem. In this paper, we consider portfolio optimization problem with Second order Stochastic Dominance (SSD) constraints for Borsa Istanbul Stocks. Our results show that, for Borsa Istanbul, more efficient portfolios can be obtained with SSD constraint than conventional one. Furthermore we present SSD pairwise efficiency of stocks returns at Borsa Istanbul by using second order SD criteria. The results are important in terms of risk measures of an investment return.

Keywords

Stochastic dominance stochastic order portfolio optimization efficiency financial returns

References

  • Bawa, V. S. (1975). Optimal rules for ordering uncertain prospects. Journal of Financial Economics, 2(1), 95-121.
  • Bawa, V. S. (1982). Research Bibliography—Stochastic Dominance: A Research Bibliography. Management Science, 28(6), 698-712.
  • De Giorgi, E. (2005). Reward–risk portfolio selection and stochastic dominance. Journal of Banking & Finance, 29(4), 895-926.
  • De Giorgi, E. ve Post, T. (2008). Second-order stochastic dominance, reward-risk portfolio selection, and the CAPM. Journal of Financial and Quantitative Analysis, 43(02), 525-546.
  • Dentcheva, D. ve Ruszczynski, A. (2006). Portfolio optimization with stochastic dominance constraints. Journal of
  • Banking & Finance, 30(2), 433-451. Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2007). Modern portfolio theory and investment analysis. John Wiley & Sons.
  • Fábián, C. I., Mitra, G., Roman, D. ve Zverovich, V. (2011). An enhanced model for portfolio choice with SSD criteria: a constructive approach. Quantitative Finance, 11(10), 1525-1534.
  • Fábián, C. I., Mitra, G., Roman, D., Zverovich, V., Vajnai, T., Csizmás, E., & Papp, O. 2011. “Portfolio choice models based on second-order stochastic dominance measures: an overview and a computational study ”. Stochastic
  • Optimization Methods in Finance and Energy (pp. 441-469). Springer New York. Fidan N., Uryasev S. ve Kuzmenko V., (2010). Second Order Stochastic Dominance Portfolio Optimization:
  • Practical Experience (Invited Paper), 7th Conference on Computational Management Science (CMS2010), AVUSTURYA, 28-30 Temmuz 2010.
  • Hadar, J. ve Russell, W. R. (1969). Rules for ordering uncertain prospects. The American Economic Review, 25-34.
  • Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91.
  • Hadar, J. ve Russell, W. R. (1971). Stochastic dominance and diversification.Journal of Economic Theory, 3(3), 288- 30
  • Hanoch, G. ve Levy, H. (1969). The efficiency analysis of choices involving risk. The Review of Economic Studies, 36(3), pp.335-346.
  • Markowitz, H. M., Todd, G. P. ve Sharpe, W. F. (2000). Mean-variance analysis in portfolio choice and capital markets (Vol. 66). John Wiley & Sons.
  • Kuosmanen, T. (2004). Efficient diversification according to stochastic dominance criteria. Management Science, 50(10), 1390-1406.
  • Kopa, M. ve Chovanec, P. (2008). A second-order stochastic dominance portfolio efficiency measure. Kybernetika, 44(2), 243-258.
  • Ogryczak, W., & Ruszczyński, A. (1999). From stochastic dominance to mean-risk models: Semideviations as risk measures. European Journal of Operational Research, 116(1), 33-50.
  • Porter, R. B., Wart, J. R. ve Ferguson, D. L. (1973). Efficient algorithms for conducting stochastic dominance tests on large numbers of portfolios. Journal of Financial and Quantitative Analysis, 8(01), 71-81.
  • Rudolf, G. ve Ruszczynski, A. (2008). Optimization problems with second order stochastic dominance constraints: duality, compact formulations, and cut generation methods. SIAM Journal on Optimization, 19(3), 1326-1343.
  • Whitmore, G. A. (1970). Third-degree stochastic dominance. The American Economic Review, 457-459.
  • Whitmore, G. A., & Findlay, M. C. (Eds.). (1978). Stochastic dominance: an approach to decision-making under risk. Lexington Books.
  • Tsay, R. S. (2010). Analysis of financial time series (Vol. 543). John Wiley & Sons.

Year 2015, Volume: 2 Issue: 3, 0 - 0, 29.09.2015

Neslihan Fidan Kececi

Abstract

Ortalama-varyans portföy teorisi portföy seçim problemi için kullanılan en yaygın yaklaşımlardan birisidir. Yakın geçmişte, stokastik baskınlık kısıtlı optimizasyon problemi ile etkin portföylerin bulunabileceğini gösteren çalışmalar geliştirilmiştir. Bu çalışmada Borsa İstanbul Hisse senetleri için İkinci Derece Stokastik Baskınlık kısıtlı portföy optimizasyonu problemi dikkate alınmaktadır. Sonuçlarımız Borsa İstanbul için İkinci Derece Stokastik Baskınlık kısıtlı optimizasyon problemi ile geleneksel yöntemlere nazaran daha etkin portföyler bulunabileceğini göstermektedir. Ayrıca Borsa İstanbul’da işlem gören şirketlere ait hisse senedi getirilerinin ikişerli etkinlikleri Stokastik Baskınlık kriteri kullanılarak analiz edilmiştir. Sonuçlar bir yatırım getirisinin riski açısından önem taşımaktadır. 1. GİRİŞ

References

  • Bawa, V. S. (1975). Optimal rules for ordering uncertain prospects. Journal of Financial Economics, 2(1), 95-121.
  • Bawa, V. S. (1982). Research Bibliography—Stochastic Dominance: A Research Bibliography. Management Science, 28(6), 698-712.
  • De Giorgi, E. (2005). Reward–risk portfolio selection and stochastic dominance. Journal of Banking & Finance, 29(4), 895-926.
  • De Giorgi, E. ve Post, T. (2008). Second-order stochastic dominance, reward-risk portfolio selection, and the CAPM. Journal of Financial and Quantitative Analysis, 43(02), 525-546.
  • Dentcheva, D. ve Ruszczynski, A. (2006). Portfolio optimization with stochastic dominance constraints. Journal of
  • Banking & Finance, 30(2), 433-451. Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2007). Modern portfolio theory and investment analysis. John Wiley & Sons.
  • Fábián, C. I., Mitra, G., Roman, D. ve Zverovich, V. (2011). An enhanced model for portfolio choice with SSD criteria: a constructive approach. Quantitative Finance, 11(10), 1525-1534.
  • Fábián, C. I., Mitra, G., Roman, D., Zverovich, V., Vajnai, T., Csizmás, E., & Papp, O. 2011. “Portfolio choice models based on second-order stochastic dominance measures: an overview and a computational study ”. Stochastic
  • Optimization Methods in Finance and Energy (pp. 441-469). Springer New York. Fidan N., Uryasev S. ve Kuzmenko V., (2010). Second Order Stochastic Dominance Portfolio Optimization:
  • Practical Experience (Invited Paper), 7th Conference on Computational Management Science (CMS2010), AVUSTURYA, 28-30 Temmuz 2010.
  • Hadar, J. ve Russell, W. R. (1969). Rules for ordering uncertain prospects. The American Economic Review, 25-34.
  • Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91.
  • Hadar, J. ve Russell, W. R. (1971). Stochastic dominance and diversification.Journal of Economic Theory, 3(3), 288- 30
  • Hanoch, G. ve Levy, H. (1969). The efficiency analysis of choices involving risk. The Review of Economic Studies, 36(3), pp.335-346.
  • Markowitz, H. M., Todd, G. P. ve Sharpe, W. F. (2000). Mean-variance analysis in portfolio choice and capital markets (Vol. 66). John Wiley & Sons.
  • Kuosmanen, T. (2004). Efficient diversification according to stochastic dominance criteria. Management Science, 50(10), 1390-1406.
  • Kopa, M. ve Chovanec, P. (2008). A second-order stochastic dominance portfolio efficiency measure. Kybernetika, 44(2), 243-258.
  • Ogryczak, W., & Ruszczyński, A. (1999). From stochastic dominance to mean-risk models: Semideviations as risk measures. European Journal of Operational Research, 116(1), 33-50.
  • Porter, R. B., Wart, J. R. ve Ferguson, D. L. (1973). Efficient algorithms for conducting stochastic dominance tests on large numbers of portfolios. Journal of Financial and Quantitative Analysis, 8(01), 71-81.
  • Rudolf, G. ve Ruszczynski, A. (2008). Optimization problems with second order stochastic dominance constraints: duality, compact formulations, and cut generation methods. SIAM Journal on Optimization, 19(3), 1326-1343.
  • Whitmore, G. A. (1970). Third-degree stochastic dominance. The American Economic Review, 457-459.
  • Whitmore, G. A., & Findlay, M. C. (Eds.). (1978). Stochastic dominance: an approach to decision-making under risk. Lexington Books.
  • Tsay, R. S. (2010). Analysis of financial time series (Vol. 543). John Wiley & Sons.
There are 23 citations in total.

Details

Journal Section Articles
Authors

Neslihan Fidan Kececi

Publication Date September 29, 2015
Published in Issue Year 2015 Volume: 2 Issue: 3

Cite

APA Kececi, N. F. (2015). SECOND ORDER STOCHASTIC DOMINANCE EFFICIENCY ANALYSIS OF BORSA ISTANBUL. Journal of Economics Finance and Accounting, 2(3). https://doi.org/10.17261/Pressacademia.2015312966

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