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Mean-variance versus full-scale optimization: Broad evidence for the UK

Hagstroemer, Bjorn; Anderson, Richard G.; Binner, Jane M.; Elger, Thomas LU and Nilsson, Birger LU (2008) In Manchester School 76(s1). p.134-156
Abstract
Portfolio choice by full-scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory, under which full-scale optimization is a substantially better approach than the mean-variance approach. As the equity indices have return distributions with small deviations from normality, the findings indicate much broader usefulness of full-scale optimization than has earlier been shown. The results hold in- and out-of-sample, and the performance improvements are given in terms of utility as well as certainty... (More)
Portfolio choice by full-scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory, under which full-scale optimization is a substantially better approach than the mean-variance approach. As the equity indices have return distributions with small deviations from normality, the findings indicate much broader usefulness of full-scale optimization than has earlier been shown. The results hold in- and out-of-sample, and the performance improvements are given in terms of utility as well as certainty equivalents. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Manchester School
volume
76
issue
s1
pages
134 - 156
publisher
Wiley-Blackwell
external identifiers
  • wos:000259038600007
  • scopus:49749105257
ISSN
1463-6786
DOI
10.1111/j.1467-9957.2008.01084.x
language
English
LU publication?
yes
id
c0300b33-a38f-44c8-8a33-419790e38482 (old id 1246876)
date added to LUP
2008-11-19 10:05:55
date last changed
2017-01-01 04:33:12
@article{c0300b33-a38f-44c8-8a33-419790e38482,
  abstract     = {Portfolio choice by full-scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory, under which full-scale optimization is a substantially better approach than the mean-variance approach. As the equity indices have return distributions with small deviations from normality, the findings indicate much broader usefulness of full-scale optimization than has earlier been shown. The results hold in- and out-of-sample, and the performance improvements are given in terms of utility as well as certainty equivalents.},
  author       = {Hagstroemer, Bjorn and Anderson, Richard G. and Binner, Jane M. and Elger, Thomas and Nilsson, Birger},
  issn         = {1463-6786},
  language     = {eng},
  number       = {s1},
  pages        = {134--156},
  publisher    = {Wiley-Blackwell},
  series       = {Manchester School},
  title        = {Mean-variance versus full-scale optimization: Broad evidence for the UK},
  url          = {http://dx.doi.org/10.1111/j.1467-9957.2008.01084.x},
  volume       = {76},
  year         = {2008},
}