Optimal portfolio strategy with cross-correlation matrix composed by DCCA coefficients: Evidence from the Chinese stock market

Xuelian Sun and Zixian Liu

Physica A: Statistical Mechanics and its Applications, 2016, vol. 444, issue C, 667-679

Abstract: In this paper, a new estimator of correlation matrix is proposed, which is composed of the detrended cross-correlation coefficients (DCCA coefficients), to improve portfolio optimization. In contrast to Pearson’s correlation coefficients (PCC), DCCA coefficients acquired by the detrended cross-correlation analysis (DCCA) method can describe the nonlinear correlation between assets, and can be decomposed in different time scales. These properties of DCCA make it possible to improve the investment effect and more valuable to investigate the scale behaviors of portfolios. The minimum variance portfolio (MVP) model and the Mean–Variance (MV) model are used to evaluate the effectiveness of this improvement. Stability analysis shows the effect of two kinds of correlation matrices on the estimation error of portfolio weights. The observed scale behaviors are significant to risk management and could be used to optimize the portfolio selection.

Keywords: DCCA coefficients; PCC; Portfolio; Efficient frontier (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:444:y:2016:i:c:p:667-679

DOI: 10.1016/j.physa.2015.10.065

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