We propose some portfolio selection models based on Cumulative Prospect Theory. In particular, we consider alternative probability weighting functions in order to model probability distortion. The resulting mathematical programming problem turns out to be highly non-linear and non-differentiable. So, we adopt a solution approach based on the metaheuristic Particle Swarm Optimization. We select the portfolios under the behavioral approach and perform an application to the European equity market as represented by the STOXX Europe 600 Index and compare their performances.
Alternative Probability Weighting Functions in Behavioral Portfolio Selection
Diana Barro
;Marco Corazza
;Martina Nardon
2023-01-01
Abstract
We propose some portfolio selection models based on Cumulative Prospect Theory. In particular, we consider alternative probability weighting functions in order to model probability distortion. The resulting mathematical programming problem turns out to be highly non-linear and non-differentiable. So, we adopt a solution approach based on the metaheuristic Particle Swarm Optimization. We select the portfolios under the behavioral approach and perform an application to the European equity market as represented by the STOXX Europe 600 Index and compare their performances.
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