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2833. Behavioural portfolio optimization with sustainable attitudes: an application to the STOXX Europe 600
Invited abstract in session MA-8: Portfolio optimization and sustainability, stream AI & Innovation in Sustainable Finance.
Monday, 8:30-10:00Room: 1020 (building: 202)
Authors (first author is the speaker)
| 1. | Filippo Piccotto
|
| Department of Economics, Business, Mathematics and Statistics, University of Trieste | |
| 2. | Massimiliano Kaucic
|
| Department of Economics, Business, Mathematics and Statistics, University of Trieste |
Abstract
Since its introduction, cumulative prospect theory (CPT) has emerged as a significant approach for modeling the irrationality of the decision makers’ behavior in complex real situations. Moreover, the interplay between rational finance theories and behavioral finance framework is becoming an intriguing stream of research. To harmonize these two paradigms, a recent contribution in the literature proposed a modification of the PT value function and several alternative probability weighting functions to extend the classical CPT model.
The contribution of this paper is twofold. On the one hand, our study delves into these alternative value functions and proposes a CPT-based portfolio optimization model that aligns with rational dynamic asset pricing models while ensuring Environmental, Social, and Governance (ESG) compliance in the investment process. Furthermore, our portfolio design integrates cardinality, box, and budget constraints, while an upper bound for the portfolio turnover maintains control of the transaction costs during the rebalancing phases. On the other hand, to tackle the ensuing optimization problem, we propose a novel hybrid constraint-handling technique embedded into a level-based learning swarm optimizer. Finally, using data from the STOXX Europe 600 Index, we test the profitability of the proposed portfolio optimization strategy.
This is a joint work with Professor Massimiliano Kaucic, who will be co-presenter of the paper at the Conference.
Keywords
- Optimization in Financial Mathematics
- OR in Sustainability
- Decision Support Systems
Status: accepted
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