Portfolio optimization under distribution uncertainty with a feature fusion of conditional skewness GARCH model

Yousaf Ali Khan, Muneeb Ahmad () and Muhammad Munir Ahmad ()
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Yousaf Ali Khan: Department of Mathematics and Statistics, Hazara University Mansehra 23010, Pakistan2School of Statistics, Jiangxi University of Finance and Economics, Nanchang, P. R. China
Muneeb Ahmad: School of Finance, Jiangxi University of Finance and Economics, Nanchang, P. R. China
Muhammad Munir Ahmad: Department of Commerce, Allama Iqbal Open University Islamabad, Islamabad, Pakistan

International Journal of Financial Engineering (IJFE), 2023, vol. 10, issue 02, 1-19

Abstract: In this study, the currency exchange portfolios are optimized by applying an amalgamation of Coskewness and GARCH (1,1) models to ensure conditional skewness based on the GARCH (1,1) model, a new analysis technique is anticipated for the Conditional Skewness in auto-regressive uncertain instability. Applications of Mean–Variance through financial statistics confirm the validation of the projected evaluation process. The conditional skewness dependence on conditional variance is due to the proposed model’s effectiveness with the volatility feedback effect. For the Japanese stocks and the currency exchange rates, conditional risk-minimizing hedge strategies are estimated from July 2000 to June 2020. The empirical results illustrate that the best vibrant hedging strategies can moderately detain the currency rate variations seriously and decrease the currency rate risk by increasing and the portfolios’ risk-adjusted returns. Conditional skewness in the daily post-war Japanese stock returns confirms the importance of the model’s capability to optimize portfolios. All stock and currency exchange return portfolios are positively correlated with each other. Ultimately, our study results present that the exchange rate volatility can be modeled effectively by the GARCH model in a straightforward and uncomplicated method.

Keywords: Stocks and currency portfolios; mean–variance; conditional skewness; GARCH; Japan stock (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S242478632350007X

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