Optimizing Portfolio through Extreme Value Theory in Tehran Stock Exchange

Subject Areas : Financial engineering

Afsaneh Sina ¹ , Mirfeiz Fallahshams ²

1 - Financial Management Department, Faculty of Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran
2 - Department of Business Management, Faculty of Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran

Received: 2019-06-18 Accepted : 2019-07-10 Published : 2019-09-23

Keywords: Portfolio, Likelihood Function, Value Creation Theory, Value at Risk (VaR),

Abstract :

Creating a balance between risk and return has always been the major criterion in investment decisions in stock exchange. All investors look for an optimized compromise for their investments so that the utility function of their investment is maximized. This study aims at arriving at a more efficient model for optimizing investment portfolio. This model is to consider uncertainty and investment risk on the way to create a bigger return for the investors. In this way, Extreme value theory for assessing investment risk, as one of the newest assessors of value at risk (VaR) was utilized. The time of this study covers the period from 2013 to 2018. The sample includes top 50 companies in Tehran Stock Exchange. Using GARCH method and maximizing likelihood function, the type of return distribution of top companies of Tehran Stock Exchange was determined at the first step. Next, efficiency frontier for investment risk in Tehran Exchange was compared to Markovitz model`s efficient frontier, using a quadric planning model through a Extreme value theory approach. The results of this study signify that forming an optimized investment portfolio through a Extreme value model would not make any significant difference with Morkovitz Variance-Mean model.