Using Investment Portfolio Return to Combine Forecasts: A Multi-Objective Approach
35 Pages Posted: 21 Nov 2000
There are 2 versions of this paper
Using Investment Portfolio Return to Combine Forecasts: A Multi-Objective Approach
Using Investment Portfolio Return to Combine Forecasts: A Multi-Objective Approach
Date Written: July 2001
Abstract
This study investigates the usefulness and efficacy of a multiobjective decision method for financial trading guided by a set of seemingly diverse analysts' forecasts. The paper proposes a goal programming (GP) approach which combines various forecasts based on the performance of their previous investment returns. In our experiment, several series of financial analysts' forecasts are generated by different forecasting techniques. Investment returns on each series of forecasts are measured and then evaluated by three performance criteria, namely, mean, variance, and skewness. Subsequently, these distributional properties of the returns are used to construct a GP model. Results of the GP model provide a set of weights to compose an investment portfolio using various forecasts. To examine its practicality, the approach is tested on several major stock market indices. The performance of the proposed GP approach is compared with those of individual forecasting techniques and a number of forecast combination models suggested by previous studies. This comparison is conducted with respect to different levels of investor preference over return, variance, and skewness. Statistical significance of the results are accessed by bootstrap re-sampling. Empirical results indicate that, for all examined investor preference functions and market indices, the GP approach is significantly better than all other models tested in this study.
Keywords: Investment analysis, neural networks, econometric forecasting, goal programming, combining forecasts, multiobjective decision analysis
JEL Classification: C22, C35, C45, C61, G11
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption and Portfolio Decisions When Expected Returns are Time Varying
By John Y. Campbell and Luis M. Viceira
-
On the Predictability of Stock Returns: An Asset-Allocation Perspective
-
Who Should Buy Long-Term Bonds?
By John Y. Campbell and Luis M. Viceira
-
Who Should Buy Long-Term Bonds?
By John Y. Campbell and Luis M. Viceira
-
A Multivariate Model of Strategic Asset Allocation
By John Y. Campbell, Yeung Lewis Chan, ...
-
A Multivariate Model of Strategic Asset Allocation
By John Y. Campbell, Yeung Lewis Chan, ...
-
Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets
By George Chacko and Luis M. Viceira
-
Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets
By George Chacko and Luis M. Viceira