TY - JOUR
T1 - On the non-stationarity of financial time series
T2 - Impact on optimal portfolio selection
AU - Livan, Giacomo
AU - Inoue, Jun Ichi
AU - Scalas, Enrico
PY - 2012/7
Y1 - 2012/7
N2 - 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 us 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.
AB - 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 us 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.
KW - financial instruments and regulation
KW - risk measure and management
UR - http://www.scopus.com/inward/record.url?scp=84864400321&partnerID=8YFLogxK
U2 - 10.1088/1742-5468/2012/07/P07025
DO - 10.1088/1742-5468/2012/07/P07025
M3 - Article
SN - 1742-5468
VL - 2012
JO - Journal of Statistical Mechanics: Theory and Experiment
JF - Journal of Statistical Mechanics: Theory and Experiment
IS - 7
M1 - P07025
ER -