Portfolios Optimizations of Behavioral Stocks with Perception Probability Weightings

Kuo-Hwa Chang () and Michael Young ()
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Kuo-Hwa Chang: Department of Industrial and Systems Engineering, Chung Yuan Christian University
Michael Young: Department of Industrial and Systems Engineering, Chung Yuan Christian University

Annals of Economics and Finance, 2019, vol. 20, issue 2, 817-845

Abstract: Having traceable stock price movements and predictable market trends can always benefit investors. Considering specific irrational investor behaviors that may collectively affect a stock's price movement, we identified the cause-and-effect return patterns of affected stocks (behavioral-stocks) with their corresponding time-to-effects and likelihood-of-effects. Considering different individual investor perceptions on future market performances, we transformed investor perceptions into probability weights on future market performances, wherein the weights are also consistent with the estimated likelihood-of-effects of behavioral-stocks. Utilizing a scenario-based mixed-integer behavioral-stocks portfolio optimization program embedded with a new two-dimensional weightings on scenarios and behavioral-stocks, we obtained portfolios that statistically outperform the market.

Keywords: Portfolio management; Behavioral portfolio optimization; Irrational behaviors; Probability weightings; Mixed integer program (search for similar items in EconPapers)
JEL-codes: C61 G02 G11 G17 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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