TITLE:
A Method for Portfolio Selection Based on Joint Probability of Co-Movement of Multi-Assets
AUTHORS:
Tianmin Zhou
KEYWORDS:
Portfolio Selection, Mean-Variance, Joint Probability Density, Cross-Entropy Approach
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.8 No.3,
August
7,
2018
ABSTRACT: This paper presents a method of portfolio selection for reducing co-related
risks. Differing from the Markowitz’s mean-variance framework, we use the
joint probability of co-movement of multi-assets (JPCM) as a measure of
risks, and under the condition of minimizing the JPCM, we pinpoint the optimal
portfolio by optimizing the JPCM matrix of paired assets. At the same
time, we use the shape parameter of generalized error distribution (GED) to
measure the tail shapes of different portfolios. The empirical results for China’s
stock market show that the JPCM portfolios significantly outperform
naive-diversified portfolios (1/N-rule) and minimum-variance (MV) in terms
of the tail shape of portfolio distribution.