Browse > Article
http://dx.doi.org/10.7737/JKORMS.2013.38.2.075

Developing an Investment Framework based on Markowitz's Portfolio Selection Model Integrated with EWMA : Case Study in Korea under Global Financial Crisis  

Park, Kyungchan (연세대학교 경영대학 경영학과)
Jung, Jongbin (연세대학교 경영대학 경영학과)
Kim, Seongmoon (연세대학교 경영대학 경영학과)
Publication Information
Journal of the Korean Operations Research and Management Science Society / v.38, no.2, 2013 , pp. 75-93 More about this Journal
Abstract
In applying Markowitz's portfolio selection model to the stock market, we developed a comprehensive investment decision-making framework including key inputs for portfolio theory (i.e., individual stocks' expected rate of return and covariance) and minimum required expected return. For estimating the key inputs of our decision-making framework, we utilized an exponentially weighted moving average (EWMA) which places more emphasis on recent data than the conventional simple moving average (SMA). We empirically analyzed the investment results of the decision-making framework with the same 15 stocks in Samsung Group Funds found in the Korean stock market between 2007 and 2011. This five-year investment horizon is marked by global financial crises including the U.S. subprime mortgage crisis, the collapse of Lehman Brothers, and the European sovereign-debt crisis. We measure portfolio performance in terms of rate of return, standard deviation of returns, and Sharpe ratio. Results are compared with the following benchmarks : 1) KOSPI, 2) Samsung Group Funds, 3) Talmudic portfolio based on the na$\ddot{i}$ve 1/N rule, and 4) Markowitz's model with SMA. We performed sensitivity analyses on all the input parameters that are necessary for designing an investment decision-making framework : smoothing constant for EWMA, minimum required expected return for the portfolio, and portfolio rebalancing period. In conclusion, appropriate use of the comprehensive investment decision-making framework based on the Markowitz's model integrated with EWMA proves to achieve outstanding performance compared to the benchmarks.
Keywords
Investment Decision-Making Framework; Markowitz's Portfolio Selection Model; Exponential Smoothing; Nonlinear Programming;
Citations & Related Records
Times Cited By KSCI : 3  (Citation Analysis)
연도 인용수 순위
1 김성문, 김홍선, "한국 주식시장에서 비선형계획법을 이용한 마코위츠의 포트폴리오 선정 모형의 투자 성과에 관한 연구", 경영과학, 제26권, 제2호(2009), pp.19-35.   과학기술학회마을
2 김재영, "[금융특집] '한국대표, 가장 믿을 건 너희들' 그룹주펀드에 돈이 몰린다", 동아일보, (2010).
3 류 정, "톱 20위 중 15개가 삼성그룹株투자 펀드", 조선일보(2012. 07. 02).
4 류춘호, "1차 확률적 지배를 하는 최대수익 포트폴리오 가중치의 탐색에 관한 연구", 한국경영과학회지, 제34권, 제4호(2009), pp.153-163.   과학기술학회마을
5 엄철준, "최적자산배분이론의 유용성에 관한 연구", 산업경제연구, 제16권, 제5호(2003), pp.17-26.
6 최재호, 정종빈, 김성문, "마코위츠 포트폴리오 선정 모형을 기반으로 한 투자 알고리즘 개발 및 성과평가 : 미국 및 홍콩 주식시장을 중심으로", 경영과학, 제30권, 제1호(2013), pp.73-89.   과학기술학회마을   DOI   ScienceOn
7 최형석, "[펀드 따라잡기] 삼성, 펀드수익률도 '대한민국 대표선수'", 조선일보(2008).
8 Albright, S.C. and W.L. Winston, Management Science Modeling, 3rd edition, Thomson (South-Western), 2009.
9 Bawa, V.S., S.J. Brown, and R.W. Klein, Estimation Risk and Optimal Portfolio Choice, Amsterdam : North-Holland, 1979.
10 Ben-Tal, A., T. Margalit, and A.N. Nemirovski, "Robust modeling of multi-stage portfolio problems," in Frenk H., K. Roos, T. Terlaky, and S. Zhang (Eds.), High performance optimization, Dordrecht : Kluwer, 2002.
11 Best, M.J. and R.R. Grauer, "On the sensitivity of mean-variance-efficient portfolios to changes in asset means : some analytical and computational results," The Review of Financial Studies, Vol.4, No.2(1991), pp.315-342.   DOI   ScienceOn
12 Blume, M.E., "Portfolio Theory : A Step Toward Its Practical Application," The Journal of Business, Vol.43, No.2(1970), pp.152-173.   DOI   ScienceOn
13 Bodie, Z., A. Kane, and A.J. Marcus, Investments, 9th edition, New York : McGraw-Hill, 2011.
14 Boudoukh, J., M. Richardson, and R.F. Whitelaw, "Investigation of a class of volatility estimators," The Journal of Derivatives, Vol.4, No.3 (1997), pp.63-71.   DOI
15 Broadie, M., "Computing efficient frontiers using estimated parameters," Annals of Operations Research, Vol.45(1993), pp.21-58.   DOI
16 Cuthbertson, K. and D. Nitzsche, Financial Engineering : Derivatives and Risk Management, John Wiley and Sons, 2001.
17 Chan, L., J. Karceski, and J. Lakonishok, "On portfolio optimization : forecasting covariances and choosing the risk model," Review of Financial Studies, Vol.12, No.5(1999), pp. 937-974.   DOI   ScienceOn
18 Chiang, T.C. and D. Zheng, "An empirical analysis of herd behavior in global stock markets," Journal of Banking and Finance, Vol.34(2010), pp.1911-1921.   DOI   ScienceOn
19 Chopra, V.K. and W.T. Ziemba, "The effect of errors in means, variances, and covariances on optimal portfolio choice," Journal of Portfolio Management, Vol.19, No.2(1993), pp.6-11.
20 DeMiguel, V., L. Garlappi, F.J. Nogales, and R. Uppal, "A Generalized Approach to Portfolio Optimization : Improving Performance by Constraining Portfolio Norms," Management Science, Vol.55, No.5(2009), pp.798-812.   DOI   ScienceOn
21 DeMiguel, V., L. Garlappi, and R. Uppal, "Optimal Versus Naive Diversification : How Inefficient is the 1/N Portfolio Strategy?," Review of Financial Studies, Vol.22, No.5 (2009), pp.1915-1953.   DOI
22 DeMiguel, V. and F.J. Nogales, "Portfolio Selection with Robust Estimation," Operations Research, Vol.57, No.3(2009), pp.560-577.   DOI   ScienceOn
23 Duchin, R. and H. Levy, "Markowitz versus the Talmudic portfolio diversification strategies," The Journal of Portfolio Management, Vol.35, No.2(2009), pp.71-74.   DOI   ScienceOn
24 El Ghaoui, L., M. Oks, and F. Oustry, "Worst-Case Value-At-Risk and Robust Portfolio Optimization : A Conic Programming Approach," Operations Research, Vol.51, No.4 (2003), pp.543-556.   DOI   ScienceOn
25 Elton, E.J. and M.J. Gruber, "Modern Portfolio Theory, 1950 to Date," Journal of Banking and Finance, Vol.21, No.11(1997), pp. 1743-1759.   DOI   ScienceOn
26 Gardner Jr., E.S., "Exponential Smoothing: The State of the Art," Journal of Forecasting, Vol.4, No.1(1985), pp.1-28.   DOI
27 Fabozzi, F.J., F. Gupta, and H.M. Markowitz, "The Legacy of Modern Portfolio Theory," Journal of Investing, Vol.11, No.3(2002), pp. 7-22.
28 Fabozzi, F.J., D. Huang, and G. Zhou, "Robust portfolios : contributions from operations research and finance," Annals of Operations Research, Vol.176, No.1(2010), pp.191-220.   DOI
29 Feibel, B.J., Investment performance measurement, Hoboken, N.J. : John Wiley and Sons, 2003.
30 Gardner Jr., E.S., "Exponential smoothing : The state of the art-Part II," International Journal of Forecasting, Vol.22, No.4(2006), pp.637-666.   DOI   ScienceOn
31 Goldfarb, D. and G. Iyengar, "Robust Portfolio Selection Problems," Mathematics of Operations Research, Vol.28, No.1(2003), pp.1-38.   DOI   ScienceOn
32 Hillier, F.S., M.S. Hillier, K. Schmedders, and M. Stephens, Introduction to Management Science-A Modeling and Case Studies Approach with Spreadsheets, 3rd edition, New York : McGraw-Hill, 2008.
33 Hillier, F.S. and G.J. Lieberman, Introduction to Operations Research, 9th edition, New York : McGraw-Hill, 2010.
34 Horasanli, M. and N. Fidan, "Portfolio Selection by Using Time Varying Covariance Matrices. Journal of Economic and Social Research," Vol.9, No.2(2007), pp.1-22.
35 Morgan, J.P. and Reuters, RiskMetrics : Technical Document. Risk Management, 4th edition, New York : Morgan Guaranty Trust Company, 1996.
36 Jagannathan, R. and T. Ma, "Risk Reduction in Large Portfolios : Why Imposing the Wrong Constraints Helps," The Journal of Finance, Vol.58, No.4(2003), pp.1651-1683.   DOI   ScienceOn
37 Jorion, P., "International Portfolio Diversification with Estimation Risk," The Journal of Business, Vol.58, No.3(1985), pp.259-278.   DOI   ScienceOn
38 James, F.E., Jr., "Monthly moving averages-An effective investment tool?," Journal of Financial and Quantitative Analysis, Vol.3, No.3(1968), pp.315-326.   DOI   ScienceOn
39 Jobson, J.D. and B. Korkie, "Estimation for Markowitz Estimation Efficient Portfolios," Journal of the American Statistical Association, Vol.75, No.371(1980), pp.544-554.   DOI   ScienceOn
40 Jobson, J.D. and B. Korkie, "Putting Markowitz theory to work," The Journal of Portfolio Management, Vol.7, No.4(1981), pp.70-74.   DOI
41 Jorion, P., "Bayes-Stein Estimation for Portfolio Analysis," The Journal of Financial and Quantitative Analysis, Vol.21, No.3(1986), pp.279-292.   DOI   ScienceOn
42 Kan, R. and G. Zhou, "Optimal Portfolio Choice with Parameter Uncertainty, Journal of Financial and Quantitative Analysis," Vol. 42, No.3(2007), pp.621-656.   DOI   ScienceOn
43 Larsen, G.A., Jr., and B.G. Resnick, "Parameter Estimation Techniques, Optimization Frequency, and Portfolio Return Enhancement," The Journal of Portfolio Management, Vol.27, No.4(2001), pp.27-34.
44 Markowitz, H., "Portfolio selection," Journal of Finance, Vol.7(1952), pp.77-91.
45 Markowitz, H., Portfolio Selection : Efficient Diversification of Investments(Cowles Foundation Monograph : No. 16). New York : John Wiley and Sons, 1959.
46 Merton, R.C., "On Estimating the Expected Return on the Market : An Exploratory Investigation," Journal of Financial Economics, Vol.8(1980), pp.323-361.   DOI   ScienceOn
47 Merton, R.C., "Thoughts on the future : theory and practice of investment management," Financial Analyst Journal, Vol.59, No.1(2003), pp.17-23.
48 Penza, P. and V.K. Bansalv, Measuring market risk with value at risk, New York : John Wiley, 2001.
49 Michaud, R.O., "The Markowitz Optimization Enigma : Is "Optimized" Optimal?," Financial Analysts Journal, Vol.45, No.1(1989), pp.31-42.   DOI
50 Pantaleo, E., M. Tumminello, F. Lillo, and R.N. Mantegna, "When do improved covariance matrix estimators enhance portfolio optimization? An empirical comparative study of nine estimators," Quantitative Finance, Vol.11, No.7(2011), pp.1067-1080.   DOI   ScienceOn
51 Radin, R.L., Optimization in Operations Research, Upper Saddle River, N.J. : Prentice Hall, 1988.
52 Roy, A.D., "Safety first and the holding of assets," Econometrica, Vol.20, No.3(1952), pp.431-449.   DOI   ScienceOn
53 Sharpe, W.F., "The Sharpe Ratio," The Journal of Portfolio Management, Vol.21, No.1 (1994), pp.49-58.   DOI   ScienceOn
54 Siegel, A.F. and A. Woodgate, "Performance of Portfolios Optimized with Estimation Error," Management Science, Vol.53, No.6(2007), pp.1005-1015.   DOI   ScienceOn
55 Sullivan, W.G. and W.W. Claycombe, Fundamentals of Forecasting, Reston Publishing Company, Inc, 1977.
56 Taylor, B.W., Introduction to Management Science, 9th edition, Prentice Hall, 2007.
57 Taylor, J., "Volatility forecasting with smooth transition exponential smoothing," International Journal of Forecasting, Vol.20(2004), pp.273-286.   DOI   ScienceOn
58 Winston, W.L., Operations Research Applications and Algorithms, 4th edition, Thomson (Brooks/Cole), 2004.
59 Winston, W.L. and M. Venkataramanan, Introduction Mathematical Programming, 4th edition, Thomson (Brooks/Cole), 2003.
60 Zellner, A. and V.K. Chetty, "Prediction and Decision Problems in Regression Models from the Bayesian Point of View," Journal of the American Statistical Association, Vol. 60(1965), pp.608-616.   DOI   ScienceOn