In this paper, we discuss portfolio selection strategies for Enhanced Indexation (EI), which are based on stochastic dominance relations. The goal is to select portfolios that stochastically dominate a given benchmark but that, at the same time, must generate some excess return with respect to a benchmark index. To achieve this goal, we propose a new methodology that selects portfolios using the ordered weighted average (OWA) operator, which generalizes previous approaches based on minimax selection rules and still leads to solving linear programming models. We also introduce a new type of approximate stochastic dominance rule and show that it implies the almost Second-order Stochastic Dominance (SSD) criterion proposed by Lizyayev and Ruszczyński (2012). We prove that our EI model based on OWA selects portfolios that dominate a given benchmark through this new form of stochastic dominance criterion. We test the performance of the obtained portfolios in an extensive empirical analysis based on real-world datasets. The computational results show that our proposed approach outperforms several SSD-based strategies widely used in the literature, as well as the global minimum variance portfolio.

Cesarone, F., Puerto, J. (2024). Flexible enhanced indexation models through stochastic dominance and ordered weighted average optimization. EUROPEAN JOURNAL OF OPERATIONAL RESEARCH, 1-31 [10.1016/j.ejor.2024.11.050].

Flexible enhanced indexation models through stochastic dominance and ordered weighted average optimization

Francesco Cesarone
;
2024-01-01

Abstract

In this paper, we discuss portfolio selection strategies for Enhanced Indexation (EI), which are based on stochastic dominance relations. The goal is to select portfolios that stochastically dominate a given benchmark but that, at the same time, must generate some excess return with respect to a benchmark index. To achieve this goal, we propose a new methodology that selects portfolios using the ordered weighted average (OWA) operator, which generalizes previous approaches based on minimax selection rules and still leads to solving linear programming models. We also introduce a new type of approximate stochastic dominance rule and show that it implies the almost Second-order Stochastic Dominance (SSD) criterion proposed by Lizyayev and Ruszczyński (2012). We prove that our EI model based on OWA selects portfolios that dominate a given benchmark through this new form of stochastic dominance criterion. We test the performance of the obtained portfolios in an extensive empirical analysis based on real-world datasets. The computational results show that our proposed approach outperforms several SSD-based strategies widely used in the literature, as well as the global minimum variance portfolio.
2024
Cesarone, F., Puerto, J. (2024). Flexible enhanced indexation models through stochastic dominance and ordered weighted average optimization. EUROPEAN JOURNAL OF OPERATIONAL RESEARCH, 1-31 [10.1016/j.ejor.2024.11.050].
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11590/493616
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 0
  • ???jsp.display-item.citation.isi??? ND
social impact