Finding optimal portfolio based on genetic algorithm with generalized Pareto distribution

- Journal title : Journal of the Korean Data and Information Science Society
- Volume 26, Issue 6, 2015, pp.1479-1494
- Publisher : Korean Data and Information Science Society
- DOI : 10.7465/jkdi.2015.26.6.1479

Title & Authors

Finding optimal portfolio based on genetic algorithm with generalized Pareto distribution

Kim, Hyundon; Kim, Hyun Tae;

Kim, Hyundon; Kim, Hyun Tae;

Abstract

Since the Markowitz's mean-variance framework for portfolio analysis, the topic of portfolio optimization has been an important topic in finance. Traditional approaches focus on maximizing the expected return of the portfolio while minimizing its variance, assuming that risky asset returns are normally distributed. The normality assumption however has widely been criticized as actual stock price distributions exhibit much heavier tails as well as asymmetry. To this extent, in this paper we employ the genetic algorithm to find the optimal portfolio under the Value-at-Risk (VaR) constraint, where the tail of risky assets are modeled with the generalized Pareto distribution (GPD), the standard distribution for exceedances in extreme value theory. An empirical study using Korean stock prices shows that the performance of the proposed method is efficient and better than alternative methods.

Keywords

Extreme value theory;genetic algorithm;GPD;portfolio optimization;VaR;

Language

Korean

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