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Portfolio Optimization Considering Behavioral Stocks with Return Scenario Generation

Author

Listed:
  • Michael N. Young

    (School of Industrial Engineering and Engineering Management, Mapua University, Manila 1002, Philippines
    These authors contributed equally to this work.)

  • TJ Troy N. Chuahay

    (Department of Finance, Chung Yuan Christian University, Taoyuan City 320, Taiwan
    These authors contributed equally to this work.)

  • Yen-Hsien Lee

    (Department of Finance, Chung Yuan Christian University, Taoyuan City 320, Taiwan
    These authors contributed equally to this work.)

  • John Francis T. Diaz

    (Department of Finance and Accounting, Asian Institute of Management, Manila 1229, Philippines
    These authors contributed equally to this work.)

  • Yogi Tri Prasetyo

    (School of Industrial Engineering and Engineering Management, Mapua University, Manila 1002, Philippines
    International Program in Engineering for Bachelor, Yuan Ze University, Chung-Li 32003, Taiwan
    Department of Industrial Engineering and Management, Yuan Ze University, Chung-Li 32003, Taiwan
    These authors contributed equally to this work.)

  • Satria Fadil Persada

    (Entrepreneurship Business Creation, Business School, Binus University, Jakarta 11480, Indonesia
    These authors contributed equally to this work.)

  • Reny Nadilfatin

    (Department of Information Systems, Institut Teknologi Sepuluh Nopember, Surabaya 60111, Indonesia
    These authors contributed equally to this work.)

Abstract

This study extends the application of behavioral portfolio optimization by estimating the return of behavioral stocks (B-stocks). With the cause-and-effect relationships of the respective irrational behaviors on the stock price movements and the unique information provided by B-stocks in terms of knowing with a calculated probability when (time duration) a specific effect (e.g., positive cumulative abnormal return) after a certain trigger point (cause of the irrational behavior) is spotted, regression analysis is applied on the information in the duration to have more accurate return estimates. To fit in the framework of behavioral portfolio optimization, the scenarios used for the optimization are generated utilizing regression analysis, based on which the safety-first scenario-based mixed-integer program is applied to obtain the optimal portfolios. This study also proposes two new types of B-stocks with corresponding operational definitions for herding and ostrich-effect, along with the previously identified over-reaction, under-reaction, and disposition-effect B-stocks. Back-test results show that the portfolios are profitable and can significantly outperform a benchmark and the market.

Suggested Citation

  • Michael N. Young & TJ Troy N. Chuahay & Yen-Hsien Lee & John Francis T. Diaz & Yogi Tri Prasetyo & Satria Fadil Persada & Reny Nadilfatin, 2022. "Portfolio Optimization Considering Behavioral Stocks with Return Scenario Generation," Mathematics, MDPI, vol. 10(22), pages 1-20, November.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:22:p:4269-:d:973272
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    References listed on IDEAS

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