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

DOI10.1088/1742-5468/2012/07/P07025MaRDI QIDQ3301374zbMATH OpenFDO

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)

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

Mathematics Subject Classification ID

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

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.

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Cites work

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• scientific article; zbMATH DE number 3046038 (Why is no real title available?)
• Dynamic instability in a phenomenological model of correlated assets
• Dynamic instability in generic model of multi-assets markets
• Noisy covariance matrices and portfolio optimization. II
• RANDOM MATRIX THEORY AND FINANCIAL CORRELATIONS
• Random matrix filtering in portfolio optimization

Cited in

(3)

• Bridging stylized facts in finance and data non-stationarities
• scientific article; zbMATH DE number 2013274 (Why is no real title available?)
• Topological recognition of critical transitions in time series of cryptocurrencies

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