The Markowitz’s Mean–Variance Interpretation under the efficient market hypothesis in the context of critical recession periods

The validity of the Efficient Market Hypothesis (EMH) as an assumption for portfolio optimization in the Mean–Variance (MV) framework under large scale financial crises is tested for two of the most prominent periods of global economic instability of the first quarter of the 21’st century. Despite t...

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Bibliographic Details
Published in:Journal of computational and applied mathematics 2023-12, Vol.434, p.115227, Article 115227
Main Authors: Martínez-Sánchez, Julio César, Berrones-Santos, Arturo, Martínez, Javier Almaguer
Format: Article
Language:English
Subjects:
Investments
Mean–variance
Optimization
Portfolio selection
Returns
Volatility
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Summary:The validity of the Efficient Market Hypothesis (EMH) as an assumption for portfolio optimization in the Mean–Variance (MV) framework under large scale financial crises is tested for two of the most prominent periods of global economic instability of the first quarter of the 21’st century. Despite that emergent large scale correlations are detected for the considered critical periods, EMH appears to hold from an expected profit standpoint. In concordance with well established results regarding risk assessment under stable economic periods, we find that the risk of the MV portfolios turns out to be however sub optimal during crises. A spatio-temporal covariance prediction model is proposed and it is shown that by the application of this predictive model to the MV framework, the portfolio’s risk assessment can to some extent be alleviated.
ISSN:0377-0427
1879-1778
DOI:10.1016/j.cam.2023.115227