A dynamic portfolio theory model based on minimum semi-absolute deviations criterion with an application in the Chinese stock markets

Purpose - The purpose of this paper is to prove the effectiveness of minimum semi-absolute deviations (MSAD) method in dynamic portfolio investment.Design methodology approach - In financial investment, the classical static portfolio theory of Markowitz type lacks the dynamic adaptability to the cha...

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Bibliographic Details
Published in:China finance review international Vol. 3; no. 3; pp. 284 - 300
Main Authors: Chen, Li, Pan, Heping
Format: Journal Article
Language:English
Published: Beijing Emerald Group Publishing Limited 02.08.2013
Subjects:
Asset allocation
Capital assets
Investment policy
Investments
Investors
Market prices
Optimization
Parameter estimation
Portfolio management
Profits
Quantitative analysis
Securities markets
Standard deviation
Stock exchanges
Studies
Theory
China
Portfolio investment
Portfolio theory
Macroeconomic factors
China
Minimum semi-absolute deviations (MSAD) criterion
Linear programming
Stock markets
Dynamic portfolio theory
ISSN:2044-1398, 2044-1401
Online Access:Get full text
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Summary:Purpose - The purpose of this paper is to prove the effectiveness of minimum semi-absolute deviations (MSAD) method in dynamic portfolio investment.Design methodology approach - In financial investment, the classical static portfolio theory of Markowitz type lacks the dynamic adaptability to the changing market situations. This paper proposes a dynamic portfolio theory which uses MSAD criterion on a moving window to replace the Markowitz mean-variance analysis.Findings - Two specific models are developed to test the validity of the MSAD method: the first model constructs a portfolio consisting of Shanghai-Shenzhen 300 Index and a national debt as two contrarian assets; the second model constructs a portfolio consisting of a complete set of 18 Chinese stock sector indices and a national debt. The empirical results of the test using six-year monthly data (2005 to 2010) provide significant evidence that the MSAD method is valid, producing superior returns of investment over the stock index during the test period.Research limitations implications - The findings in this study clearly highlight the validity of the MSAD method in determining the weights of assets in Chinese stock markets.Practical implications - In order to resolve the problem of portfolio investment in Chinese stock markets, the MSAD method with stop loss control strategy can be used for investors to obtain the weights of assets and control the risk.Originality value - This study analyzes and verifies the effectiveness of the MSAD method in dynamic portfolio investment. The stop loss control strategy designed and used in the MSAD method is a pioneering and exploratory experiment.
Bibliography:SourceType-Scholarly Journals-1
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ISSN:2044-1398
2044-1401
DOI:10.1108/CFRI-05-2012-0052