Safety-first analysis and stable Paretian approach to portfolio choice theory

S. Ortobelli L, S. T. Rachev

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

In this paper, we present some characterizations of efficient sets using the stochastic dominance rules and comparing the safety-first approach with the stable Paretian analysis. We introduce a new stable Paretian version of the Markowitz financial optimization model in order to find an optimal frontier based on a more realistic model for the distribution of asset returns. As a generalization of moments analysis, we consider a portfolio selection for an investor who wishes to allocate his initial wealth across n investments with returns following general heavy-tailed distributions. Alternatively, we show that the safety-first approach can be more efficient than the stable Paretian approach. Finally, we present two possible direct methods for portfolio choice in a safety-first world.

Original languageEnglish
Pages (from-to)1037-1072
Number of pages36
JournalMathematical and Computer Modelling
Volume34
Issue number9-11
DOIs
StatePublished - Sep 24 2001

Keywords

  • Domain of attraction
  • Efficient frontier
  • Portfolio selection
  • Safety-first portfolio
  • Stable Paretian distributions

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