Browsing by Author "Retief, Jan"
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- ItemApplication of the moving block bootstrap method to resampled efficiency : the impact of the choice of block size(Stellenbosch : Stellenbosch University, 2021-12) Retief, Jan; Conradie, W. J.; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Statistics and Actuarial Science.ENGLISH SUMMARY : Modern Portfolio theory was first developed in the 1950’s and revolutionised the way in which financial information is used to construct portfolios. Unfortunately, the theory is limited by the sensitivity of the constructed portfolio’s weights to uncertainty in the constituent’s risk and return estimates. Various advancements to the classical theory have been proposed to address this problem. One of these methods is called Resampled Efficiency (RE), which addresses the sensitivity problem by sampling expected return and risk estimates for each security included in the portfolio. Multiple portfolios are then built based on the sampled returns to construct a single averaged portfolio. The result is more robust portfolio’s that have been proven to have better out of sample performance. There are two methods available for sampling the security expected returns and risk: (1) generating random security returns (via Monte Carlo methods) or (2) using bootstrapping techniques based on observed security returns. For the second method, the moving block bootstrap (MBB) method can be used to construct bootstrapped samples for a non-stationary series of security returns. The MBB method works by ordering the historical series of observed returns into a pre-defined number of blocks (block sizes). As such, the choice of block size can have a significant effect on the sample that is obtained and used for portfolio construction. The goal of this study was to fully investigate what impact the choice of block size can have on the out of sample performance of resampled efficiency portfolios. After a literature review that assessed modern portfolio theory, resampled efficiency and the moving block bootstrap method, RE portfolios were hypothetically built based on actual security return observations. The constituents from the FTSE/JSE Top 40 index was used to construct RE portfolios for different choices of block sizes for the period between 2016 and 2017. The results indicate that the block size used can have a significant impact on the out of sample performance of the constructed portfolios, however no single block size or range of block sizes could be found that consistently result in the best performing RE portfolios. For different periods, and different levels of risk, the ideal block size differs.