SAFETY FIRST INVESTMENT PORTFOLIOS OPTIMIZATION: ALTERNATIVE VIEW ON PORTFOLIO PARADIGM OF INTERNATIONAL INVESTING ORIGIN
DOI:
https://doi.org/10.17721/apmv.2017.132.0.109-124Abstract
Gnoseological framework of contemporary paradigm of international portfolio investing origin and development is explored. It is revealed and justified that the results of Markowitz and Roy seminal fundamental research are very similar and they both have paradigm constituent meaning. The paper proves that unlike the widely spread attitude to Markowitz as to the portfolio paradigm founder its appearance is bound up with seminal research of both scholars. Their papers were published simultaneously and independently. It is evidenced that although both approaches are highly identical in terms of such points as portfolio risk identification, efficient hyperbola generation etc. Roy foresaw the paradigm development direction much farther passing Markowitz ahead as to some crucial moments. Amon them are the derivation of efficient frontier equation, risk adjusted return maximization (similar to future Sharpe Ratio maximization), optimization resulting in one rather than a set of portfolios. Moreover, Roy optimization is not biparametric but a multiparametric approach.
Safety first approaches to international portfolio optimization are explored and their comparative analysis is carried out. These approaches include Roy criteria, Telser criteria and Kataoka criteria. It is proved that the safety first approach underlies the portfolio paradigm of international investing on the one hand. On the other hand, it gave birth to the widely spread VaR concept development that was heavily utilized not only in the field of international investment management but in international banking as well. It is revealed that unlike the biparametric character of portfolio theory safety first criteria imply multiparametric optimization though both approaches represent the single paradigm.
References
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References
Arzac E. R. Portfolio Choice and Equilibrium in Capital Markets with Safety-First Investors / Enrique R. Arzac, Vijay S. Bawa // Journal of Financial Economics. – 1977. – Vol. 4, № 3. – P. 277–288.
Chiu M. C. Roy’s Safety-First Portfolio Principle in Financial Risk Management of Disastrous Events / Mei Choi Chiu, Hoi Ying Wong, Duan Li // Risk Analysis. – 2012. – Vol. 32, № 11. – P. 1856–1872.
Ding Y. The Optimal Portfolios Based on a Modified Safety-First Rule with Risk-Free Saving / Yuanyao Ding, Zudi Lu // Journal of Industrial and Management Optimization. – 2016. – Vol. 12, № 1. – P. 83–102.
Fama E. F. A Five-Factor Asset Pricing Model / Eugene F. Fama, Kenneth R. French // Journal of Financial Economics. – 2015. – Vol. 116, № 1. – P. 1–22.
Fama E. F. Common Risk Factors in the Returns on Stocks and Bonds / Eugene F. Fama, Kenneth R. French // Journal of Financial Economics. – 1993. – Vol. 33, № 1. – P. 3–56.
Graham B. Security Analysis / Benjamin Graham, David L. Dodd. – New York, London : Whittlesey House, McGraw-Hill Book Company, Inc., 1934. – 725 p.
Kataoka S. A Stochastic Programming Model / Shinji Kataoka // Econometrica. – 1963. – Vol. 31, № 1/2. – P. 181–196.
Lintner J. V. Session Topic: Portfolio Theory and Security Analysis: Discussion / John Lintner, William F. Sharpe // The Journal of Finance. – 1972. – Vol. 27, № 2 (Papers and Proceedings of the Thirties Annual Meeting of the American Finance Association, New Orleans, Louisiana, December 27-29, 1971). – P. 453–458.
Markowitz H. M. Foundations of Portfolio Theory / Harry M. Markowitz // The Journal of Finance. – 1991. – Vol. 46, № 2. – P. 469–477.
Markowitz H. M. Portfolio Selection / Harry Markowitz // The Journal of Finance. – 1952. – Vol. 7, № 1. – P. 77–91.
Markowitz H. M. Portfolio Selection: Efficient Diversification of Investments / Harry M. Markowitz. – New York : John Wiley & Sons, Inc.; London : Chapman & Hall, Ltd.; Cowles Foundation for Research in Economics at Yale University, 1959. – 344 p.
Merton R. C. An Analytic Derivation of the Efficient Portfolio Frontier / Robert C. Merton // The Journal of Financial and Quantitative Analysis. – 1972. – Vol. 7, № 4. – P. 1851– 1872.
Norkin V. I. Safety-First Portfolio Selection / V. I. Norkin, S. V. Boyko // Cybernetics and Systems Analysis. – 2012. – Vol. 48, № 2. – P. 180–191.
Roy A. D. Safety First and the Holding of Assets / A. D. Roy // Econometrica. – 1952. – Vol. 20, № 3. – P. 431–449.
Rubinstein M. Markowitz’s “Portfolio Selection”: A Fifty-Year Retrospective / Mark Rubinstein // The Journal of Finance. – 2002. – Vol. 57, № 3. – P. 1041–1045.
Telser L. G. Safety First and Hedging / Lester G. Telser // The Review of Economic Studies. – 1955–1956. – Vol. 23, № 1. – P. 1–16.
Weston J. F. Developments in Finance Theory / J. Fred Weston // Financial Management. – 1981. – Vol. 10, № 2. – P. 5–22.
