Use of DEA cross-efficiency evaluation in portfolio selection: An application to Korean stock market

Sungmook Lim, Kwang Wuk Oh and Joe Zhu

European Journal of Operational Research, 2014, vol. 236, issue 1, 361-368

Abstract: We propose a way of using DEA cross-efficiency evaluation in portfolio selection. While cross efficiency is an approach developed for peer evaluation, we improve its use in portfolio selection. In addition to (average) cross-efficiency scores, we suggest to examine the variations of cross-efficiencies, and to incorporate two statistics of cross-efficiencies into the mean-variance formulation of portfolio selection. Two benefits are attained by our proposed approach. One is selection of portfolios well-diversified in terms of their performance on multiple evaluation criteria, and the other is alleviation of the so-called “ganging together” phenomenon of DEA cross-efficiency evaluation in portfolio selection. We apply the proposed approach to stock portfolio selection in the Korean stock market, and demonstrate that the proposed approach can be a promising tool for stock portfolio selection by showing that the selected portfolio yields higher risk-adjusted returns than other benchmark portfolios for a 9-year sample period from 2002 to 2011.

Keywords: Data envelopment analysis (DEA); Cross-efficiency; Portfolio selection; Stock market (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (47)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:236:y:2014:i:1:p:361-368

DOI: 10.1016/j.ejor.2013.12.002

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