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Portfolio selection under uncertainty by the ordered modular average operator

Author

Listed:
  • Hong-Quan Li

    (Hunan Normal University
    Hunan Normal University)

  • Zhi-Hong Yi

    (Hunan Normal University
    Hunan Normal University
    Jiangxi University of Finance & Economics)

  • Yong Fang

    (Chinese Academy of Sciences)

Abstract

In a world under uncertainty, the beliefs for the information underlie the behavioral style of portfolio decisions in portfolio management. In this work, we use the copula-based ordered modular averages (OMAs) in the calculation of the mean and variance of the assets’ returns for portfolio selection to capture the beliefs of the investors and the departure of rationality in evaluation. Specially, the outcomes and the probability information in terms of the decumulative probabilities are jointly transformed using appropriate copulas while satisfying the stochastic dominance in the probability-sensitivity evaluation. In addition, the diversity of the underlying copulas facilitates the challenge of the diversity of investors with different beliefs for expectations. Consequently, the mean-variance model in this work using OMA with the decumulative probabilities can encode not only the decision makers’ assessment of relative likelihoods but also the confidence attached to such assessment in the evaluation.

Suggested Citation

  • Hong-Quan Li & Zhi-Hong Yi & Yong Fang, 2019. "Portfolio selection under uncertainty by the ordered modular average operator," Fuzzy Optimization and Decision Making, Springer, vol. 18(1), pages 1-14, March.
    • Handle: RePEc:spr:fuzodm:v:18:y:2019:i:1:d:10.1007_s10700-018-9295-2
    DOI: 10.1007/s10700-018-9295-2
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    References listed on IDEAS

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    1. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    2. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    3. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    4. Yong Fang & Kin Keung Lai & Shouyang Wang, 2008. "Fuzzy Portfolio Optimization," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-77926-1, October.
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    Cited by:

    1. Kocherlakota Satya Pritam & Trilok Mathur & Shivi Agarwal & Sanjoy Kumar Paul & Ahmed Mulla, 2022. "A novel methodology for perception-based portfolio management," Annals of Operations Research, Springer, vol. 315(2), pages 1107-1133, August.

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