EURO-Online login
- New to EURO? Create an account
- I forgot my username and/or my password.
- Help with cookies
(important for IE8 users)
1894. Portfolio selection based on the Herd Behavior Index
Invited abstract in session MD-57: Methodology in asset allocation and banking, stream Modern Decision Making in Finance and Insurance.
Monday, 14:30-16:00Room: S06 (building: 101)
Authors (first author is the speaker)
| 1. | Churui Li
|
| Faculty of Economics and Business, KU Leuven | |
| 2. | Daniel Linders
|
| University of Amsterdam | |
| 3. | Wing Fung Chong
|
| Heriot-Watt University |
Abstract
In this paper, we propose to determine optimal portfolios using the Herd Behavior Index (HIX, Dhaene et al. (2012)). The HIX is a diversification measure that provides information about the extent to which stock prices move together in the same direction. The optimal minimum-HIX, as well as mean-HIX, portfolio can be seen as the most diversified one since it has the lowest degree of co-movement. We make use of a reformulation method for determining the minimum-HIX, and mean-HIX, portfolios, as their closed-form expressions are not readily available in a general setting. This also allows us to study the mean-HIX efficient frontier. We prove the existence of the minimum-HIX, and mean-HIX, portfolios in the general setting, and provide their closed-form expressions in the two-stock case. We also study how to determine the minimum-HIX, and mean-HIX, portfolios when short-selling is allowed. This requires us to generalize the definition of HIX in order to ensure that the (theoretical) comonotonic portfolio always exceeds the (actual) portfolio in convex order.
[1] Dhaene, J., Linders, D., Schoutens, W. & Vyncke, D. (2012), ‘The herd behavior index: A new measure for the implied degree of co-movement in stock markets’, Insurance: Mathematics and Economics 50(3), 357–370.
Keywords
- Financial Modelling
- Optimization in Financial Mathematics
Status: accepted
Back to the list of papers