Use of DEA cross-efficiency evaluation in portfolio selection: An application to Korean stock market |
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Authors: | Sungmook Lim Kwang Wuk Oh Joe Zhu |
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Affiliation: | 1. Division of Business Administration, Korea University, 2511 Sejong-ro, Sejong 339-700, Republic of Korea;2. School of Business, Worcester Polytechnic Institute, Worcester, MA 01609, USA |
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Abstract: | We propose a way of using DEA cross-efficiency evaluation in portfolio selection. While cross efficiency is an approach developed for peer evaluation, we improve its use in portfolio selection. In addition to (average) cross-efficiency scores, we suggest to examine the variations of cross-efficiencies, and to incorporate two statistics of cross-efficiencies into the mean-variance formulation of portfolio selection. Two benefits are attained by our proposed approach. One is selection of portfolios well-diversified in terms of their performance on multiple evaluation criteria, and the other is alleviation of the so-called “ganging together” phenomenon of DEA cross-efficiency evaluation in portfolio selection. We apply the proposed approach to stock portfolio selection in the Korean stock market, and demonstrate that the proposed approach can be a promising tool for stock portfolio selection by showing that the selected portfolio yields higher risk-adjusted returns than other benchmark portfolios for a 9-year sample period from 2002 to 2011. |
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Keywords: | Data envelopment analysis (DEA) Cross-efficiency Portfolio selection Stock market |
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