Economics at your fingertips  

Building multi-scale portfolios and efficient market frontiers using fractal regressions

Oussama Tilfani (), Paulo Ferreira () and My Youssef El Boukfaoui

Physica A: Statistical Mechanics and its Applications, 2019, vol. 532, issue C

Abstract: The risk-return relationship remains a hot research topic, since it continues to have some non-explored issues. For example, despite the existence of several limitations, the Capital Asset Pricing Model (CAPM) continues to be used and studied in the literature. Recently, CAPM was estimated based on fractal regressions, making it possible to distinguish between short and long-time scales, with the possibility of supporting the fractal market hypothesis. In this paper, we use this approach and extend it by building a multi-scale portfolio and efficient frontiers and considering three different market stages: pre-crisis, crisis and post-crisis, applied to the Dow Jones Index and its components. The main results show different behaviors along the different market stages, with higher scale dependence in the crisis period, when compared, for example, with the post-crisis one. Furthermore, when analyzing the efficient frontiers, it is possible to identify an inverted U-shaped relation between return and risk in the pre-crisis period, a negative relationship in the crisis period and a positive (and expected) relationship in the post-crisis period. These results show the importance of this relationship for investors, in order to build their portfolios, but also for financial authorities, because the continuous monitoring of markets could help to prevent possible crisis.

Keywords: Efficient market hypothesis; Fractal market hypothesis; Fractal regressions; Scale dependence (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.physa.2019.121758

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-09-28
Handle: RePEc:eee:phsmap:v:532:y:2019:i:c:s0378437119310003