Investigating portfolio performance with higher moment considering entropy and rolling window in banking, insurance, and leasing industries
Subject Areas : Financial EconometricsArash Amini 1 , Maryam Khalili Araghi 2 , Hashem Nikoomaram 3
1 - Department of Financial Management, Science and Research branch, Islamic Azad University, Tehran, Iran.
2 - Department of Business Management, Science and Research branch, Islamic Azad University, Tehran, Iran.
3 - Department of Accounting, Science and Research branch, Islamic Azad University, Tehran, Iran.
Keywords: Performance Evaluation, Entropy, Higher moments, Rolling window, Banking and insurance,
Abstract :
The optimal portfolio selection is vital for investment. The risk of portfolio Selection and return is the most critical concern of investment companies and private investors. According to modern portfolio theory, diversification should cover the risk. This theory is based on the normality of assets return. Experimental findings indicate that the assets return non-normality. Higher moments are sed to upgrade traditional models with the primary presumption of a normal distribution in recent years. This study uses a higher moment and the entropy for diversification and selects a portfolio given a non-normality assumption. It is essential to use up-to-date information to increase the model's efficiency, and accordingly, we used the rolling window for new price information. For the financial information method, we use the total index return in the last five working days and weigh the shares of the banking, insurance, and leasing industries on the next working day and evaluate this for three years. Python, math, and NumPy libraries were used to analyze the data. The results show that a much higher moment model can provide better portfolio selection results in most cases.
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