Portfolio Choice Based on Third-Degree Stochastic Dominance

2016-05-19 14:53:59

Dear students, faculty and staff,

Nazarbayev University Graduate School of Business invites you to Lunch-time Research Seminar

“PORTFOLIO CHOICE BASED ON THIRD-DEGREE STOCHASTIC DOMINANCE”

by Thierry Post from  Koc University Graduate School of Business

WHEN: Thursday, April 22nd, 12.00 – 13.00

WHERE: Block C-3/new GSB/GSPP Building, 3rd floor, Room 3.037

ABSTRACT:

We develop an optimization method for constructing investment portfolios that dominate a given benchmark index in terms of third-degree stochastic dominance. Our approach relies on the properties of the semivariance function, a refinement of an existing ‘super-convex’ dominance condition and quadratic constrained programming. We apply our method to historical stock market data using an industry momentum strategy. Our enhanced portfolio generates important performance improvements compared with alternatives based on mean-variance dominance and second-degree stochastic dominance. Relative to the CSRP all-share index, our portfolio increases average out-of-sample return by almost seven percentage points per annum without incurring more downside risk, using quarterly rebalancing and without short selling.

AUTHORS:

Thierry Post

Koc University – Graduate School of Business

Milos Kopa

Charles University in Prague – Faculty of Mathematics and Physics

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SPEAKER:

Prof. Post’s areas of interest are asset management, portfolio theory, asset pricing, behavioral finance and financial econometrics. In all these fields, he made seminal contributions, with over 30 articles in top international refereed journals, including American Economic Review, Journal of Finance, Review of Financial Studies, Management Science, Review of Economics and Statistics, Journal of Financial and Quantitative Analysis and Journal of Econometrics. His 2003 article in the Journal of Finance is widely credited as having started the modern literature on stochastic dominance analysis and portfolio theory. His work on behavioral finance, such as his widely cited 2008 American Economic Review article, received widespread attention in national and international newspapers and radio and tv shows. He also published a widely adopted textbook on Investments together with Prof. Haim Levy of the Hebrew University in Jerusalem. Prof Post is now Professor of Finance at Koç University and visiting at the INET Institute in the University of Cambridge. After completing his PhD in Finance at the Tinbergen Institute in 1999, he had functions as assistant professor of Finance, associate professor of Finance, full professor of Finance (Asset Pricing chair), head of the Finance department and director of the Business Economics capacity group (Finance, Accounting, Marketing and Fiscal Studies) at Erasmus School of Economics in Rotterdam. He has also held positions as a visiting professor of Finance at the University of Wales at Bangor, Cass Business School of the City University in London and Koc University Graduate School of Business. In the industry, he headed the Quantitative Strategies department of Robeco Asset Management, a team of 20 dedicated quant researchers that develops quantitative equity and fixed income investment models and strategies for about 20bn euro worth of assets under managements.