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Volume 69, Issue 4

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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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