On the non-stationarity of financial time series: impact on optimal portfolio selection

DOI10.1088/1742-5468/2012/07/P07025zbMATH Open1459.91113arXiv1205.0877MaRDI QIDQ3301374FDOQ3301374

Authors: Giacomo Livan, Jun-Ichi Inoue, Enrico Scalas 

Publication date: 11 August 2020

Published in: Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Abstract: We investigate the possible drawbacks of employing the standard Pearson estimator to measure correlation coefficients between financial stocks in the presence of non-stationary behavior, and we provide empirical evidence against the well-established common knowledge that using longer price time series provides better, more accurate, correlation estimates. Then, we investigate the possible consequences of instabilities in empirical correlation coefficient measurements on optimal portfolio selection. We rely on previously published works which provide a framework allowing to take into account possible risk underestimations due to the non-optimality of the portfolio weights being used in order to distinguish such non-optimality effects from risk underestimations genuinely due to non-stationarities. We interpret such results in terms of instabilities in some spectral properties of portfolio correlation matrices.

Full work available at URL: https://arxiv.org/abs/1205.0877

Recommendations

• STATISTICAL ESTIMATION OF OPTIMAL PORTFOLIOS FOR LOCALLY STATIONARY RETURNS OF ASSETS
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• Nonstationarity of stock returns

Mathematics Subject Classification ID

Economic time series analysis (91B84) Portfolio theory (91G10) Applications of statistical and quantum mechanics to economics (econophysics) (91B80)

Cites Work

• Random matrix filtering in portfolio optimization
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• Noisy covariance matrices and portfolio optimization. II

Cited In (3)

• Title not available (Why is that?)
• Bridging stylized facts in finance and data non-stationarities
• Topological recognition of critical transitions in time series of cryptocurrencies

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