Prospect Theory Based Portfolio Optimization Problem with Imprecise Forecasts

Massimiliano Kaucic and Roberto Daris
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Massimiliano Kaucic: University of Trieste, Italy
Roberto Daris: University of Trieste, Italy

Managing Global Transitions, 2016, vol. 14, issue 4 (Winter), 359-384

Abstract: In this paper we propose a novel interval optimization approach for portfolio selection when imprecise forecasts are available. We consider investors acting their choices according to the prospect theory, where scenarios are provided in the form of approximate numbers. The resulting constrained nonlinear interval optimization problem is converted into two nonlinear programming problems using a total order relation between intervals. Static and dynamic analysis of portfolios involving assets from the Croatian market illustrate the potential of the method with respect to the standard procedure.

Keywords: prospect theory; random sets; interval orders; interval optimization; Croatian stock market (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 G15 G17 (search for similar items in EconPapers)
Date: 2016
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