Portfolio Optimization Considering Behavioral Stocks with Return Scenario Generation

Michael N. Young, Troy N. Chuahay Tj (), Yen-Hsien Lee, John Francis T. Diaz, Yogi Tri Prasetyo, Satria Fadil Persada and Reny Nadilfatin
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Michael N. Young: School of Industrial Engineering and Engineering Management, Mapua University, Manila 1002, Philippines
Troy N. Chuahay Tj: Department of Finance, Chung Yuan Christian University, Taoyuan City 320, Taiwan
Yen-Hsien Lee: Department of Finance, Chung Yuan Christian University, Taoyuan City 320, Taiwan
John Francis T. Diaz: Department of Finance and Accounting, Asian Institute of Management, Manila 1229, Philippines
Yogi Tri Prasetyo: School of Industrial Engineering and Engineering Management, Mapua University, Manila 1002, Philippines
Satria Fadil Persada: Entrepreneurship Business Creation, Business School, Binus University, Jakarta 11480, Indonesia
Reny Nadilfatin: Department of Information Systems, Institut Teknologi Sepuluh Nopember, Surabaya 60111, Indonesia

Mathematics, 2022, vol. 10, issue 22, 1-20

Abstract: This study extends the application of behavioral portfolio optimization by estimating the return of behavioral stocks (B-stocks). With the cause-and-effect relationships of the respective irrational behaviors on the stock price movements and the unique information provided by B-stocks in terms of knowing with a calculated probability when (time duration) a specific effect (e.g., positive cumulative abnormal return) after a certain trigger point (cause of the irrational behavior) is spotted, regression analysis is applied on the information in the duration to have more accurate return estimates. To fit in the framework of behavioral portfolio optimization, the scenarios used for the optimization are generated utilizing regression analysis, based on which the safety-first scenario-based mixed-integer program is applied to obtain the optimal portfolios. This study also proposes two new types of B-stocks with corresponding operational definitions for herding and ostrich-effect, along with the previously identified over-reaction, under-reaction, and disposition-effect B-stocks. Back-test results show that the portfolios are profitable and can significantly outperform a benchmark and the market.

Keywords: behavioral stocks; regression analysis; irrational behaviors; portfolio selection; portfolio management (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
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