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Portfolio Optimization Efficiency Test Considering Data Snooping Bias

Portfolio Optimization Efficiency Test Considering Data Snooping Bias AbstractBackground: In the portfolio optimization area, most of the research is focused on insample portfolio optimization. One may ask a rational question of what the efficiency of the portfolio optimization strategy is and how to measure it.Objectives: The objective of the paper is to propose the approach to measuring the efficiency of the portfolio strategy based on the hypothesis inference methodology and considering a possible data snooping bias. The proposed approach is demonstrated on the Markowitz minimum variance model and the fuzzy probabilities minimum variance model.Methods/Approach: The proposed approach is based on a statistical test. The null hypothesis is that the analysed portfolio optimization strategy creates a portfolio randomly, while the alternative hypothesis is that an optimized portfolio is created in such a way that the risk of the portfolio is lowered.Results: It is found out that the analysed strategies indeed lower the risk of the portfolio during the market’s decline in the global financial crisis and in 94% of the time in the 2009-2019 period.Conclusions: The analysed strategies lower the risk of the portfolio in the out-of-sample period. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Business Systems Research Journal de Gruyter

Portfolio Optimization Efficiency Test Considering Data Snooping Bias

Business Systems Research Journal , Volume 11 (2): 13 – Oct 1, 2020

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Publisher
de Gruyter
Copyright
© 2020 Aleš Kresta et al., published by Sciendo
ISSN
1847-9375
eISSN
1847-9375
DOI
10.2478/bsrj-2020-0016
Publisher site
See Article on Publisher Site

Abstract

AbstractBackground: In the portfolio optimization area, most of the research is focused on insample portfolio optimization. One may ask a rational question of what the efficiency of the portfolio optimization strategy is and how to measure it.Objectives: The objective of the paper is to propose the approach to measuring the efficiency of the portfolio strategy based on the hypothesis inference methodology and considering a possible data snooping bias. The proposed approach is demonstrated on the Markowitz minimum variance model and the fuzzy probabilities minimum variance model.Methods/Approach: The proposed approach is based on a statistical test. The null hypothesis is that the analysed portfolio optimization strategy creates a portfolio randomly, while the alternative hypothesis is that an optimized portfolio is created in such a way that the risk of the portfolio is lowered.Results: It is found out that the analysed strategies indeed lower the risk of the portfolio during the market’s decline in the global financial crisis and in 94% of the time in the 2009-2019 period.Conclusions: The analysed strategies lower the risk of the portfolio in the out-of-sample period.

Journal

Business Systems Research Journalde Gruyter

Published: Oct 1, 2020

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