Mean-Variance Portfolio Optimization of Energy Stocks Supported with Second Order Stochastic Dominance Efficiency
Guran, Celal; Tas, Oktay; Ugurlu, Umut
Year: 2019 Volume: 69 Issue: 4 Pages: 366-383
Abstract: Second order stochastic dominance pairwise efficiency could be considered as a milestone among the improvements, which eliminates the shortcomings of mean-variance theory. This paper applies mean-variance optimization on the global fossil fuels stocks, as a leading representative of energy sector, with the help of the pre-elimination of second order stochastic dominance pairwise inefficient stocks. The performance of the application is additionally measured with an out-of-sample back-testing analysis, which indicates a contribution to the existing literature; second order stochastic dominance pre-elimination method increases the success of some of the selected mean-variance optimized portfolios on the efficient frontier which stand out with a better back-testing performance.
JEL classification: G11, G14
Keywords: different return-risk levels, fossil fuels energy stocks, mean-variance portfolio optimization, pairwise efficiency, second order stochastic dominance
RePEc: https://ideas.repec.org/a/fau/fauart/v69y2019i4p366-383.html
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