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Use of DEA cross-efficiency evaluation in portfolio selection: An application to Korean stock market

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  • Lim, Sungmook
  • Oh, Kwang Wuk
  • Zhu, Joe

Abstract

We propose a way of using DEA cross-efficiency evaluation in portfolio selection. While cross efficiency is an approach developed for peer evaluation, we improve its use in portfolio selection. In addition to (average) cross-efficiency scores, we suggest to examine the variations of cross-efficiencies, and to incorporate two statistics of cross-efficiencies into the mean-variance formulation of portfolio selection. Two benefits are attained by our proposed approach. One is selection of portfolios well-diversified in terms of their performance on multiple evaluation criteria, and the other is alleviation of the so-called “ganging together” phenomenon of DEA cross-efficiency evaluation in portfolio selection. We apply the proposed approach to stock portfolio selection in the Korean stock market, and demonstrate that the proposed approach can be a promising tool for stock portfolio selection by showing that the selected portfolio yields higher risk-adjusted returns than other benchmark portfolios for a 9-year sample period from 2002 to 2011.

Suggested Citation

  • Lim, Sungmook & Oh, Kwang Wuk & Zhu, Joe, 2014. "Use of DEA cross-efficiency evaluation in portfolio selection: An application to Korean stock market," European Journal of Operational Research, Elsevier, vol. 236(1), pages 361-368.
    • Handle: RePEc:eee:ejores:v:236:y:2014:i:1:p:361-368
    DOI: 10.1016/j.ejor.2013.12.002
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    References listed on IDEAS

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