On the non-stationarity of financial time series: impact on optimal portfolio selection

Livan, Giacomo, Inoue, Jun-ichi and Scalas, Enrico (2012) On the non-stationarity of financial time series: impact on optimal portfolio selection. Journal of Statistical Mechanics: Theory and Experiment, 2012. P07025. ISSN 1742-5468

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Abstract

We investigate the possible drawbacks of employing the standard Pearson estimator to measure correlation coefficients between financial stocks in the presence of non-stationary behavior, and we provide empirical evidence against the well-established common knowledge that using longer price time series provides better, more accurate, correlation estimates. Then, we investigate the possible consequences of instabilities in empirical correlation coefficient measurements on optimal portfolio selection. We rely on previously published works which provide a framework allowing to take into account possible risk underestimations due to the non-optimality of the portfolio weights being used in order to distinguish such non-optimality effects from risk underestimations genuinely due to non-stationarities. We interpret such results in terms of instabilities in some spectral properties of portfolio correlation matrices.

Item Type: Article
Schools and Departments: School of Mathematical and Physical Sciences > Mathematics
Subjects: Q Science > QA Mathematics > QA0273 Probabilities. Mathematical statistics
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Depositing User: Enrico Scalas
Date Deposited: 07 Oct 2013 18:14
Last Modified: 18 Mar 2017 20:10
URI: http://sro.sussex.ac.uk/id/eprint/46605

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