Portfolio Optimization Efficiency Test Considering Data Snooping Bias

Kresta Aleš () and Wang Anlan ()
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Kresta Aleš: VSB – Technical University of Ostrava, Faculty of Economics, Czech Republic
Wang Anlan: VSB – Technical University of Ostrava, Faculty of Economics, Czech Republic

Business Systems Research, 2020, vol. 11, issue 2, 73-85

Abstract: Background: In the portfolio optimization area, most of the research is focused on insample portfolio optimization. One may ask a rational question of what the efficiency of the portfolio optimization strategy is and how to measure it.Objectives: The objective of the paper is to propose the approach to measuring the efficiency of the portfolio strategy based on the hypothesis inference methodology and considering a possible data snooping bias. The proposed approach is demonstrated on the Markowitz minimum variance model and the fuzzy probabilities minimum variance model.Methods/Approach: The proposed approach is based on a statistical test. The null hypothesis is that the analysed portfolio optimization strategy creates a portfolio randomly, while the alternative hypothesis is that an optimized portfolio is created in such a way that the risk of the portfolio is lowered.Results: It is found out that the analysed strategies indeed lower the risk of the portfolio during the market’s decline in the global financial crisis and in 94% of the time in the 2009-2019 period.Conclusions: The analysed strategies lower the risk of the portfolio in the out-of-sample period.

Keywords: data snooping bias; financial crisis; hypothesis test; minimum-risk portfolio; portfolio optimization (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:bit:bsrysr:v:11:y:2020:i:2:p:73-85:n:6

DOI: 10.2478/bsrj-2020-0016

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