A1 Journal article (refereed), original research
Comparison of the multicriteria decision-making methods for equity portfolio selection: The U.S. evidence


Publication Details
Authors: Pätäri Eero, Karell Ville, Luukka Pasi, Yeomans Julian S.
Publisher: Elsevier
Publication year: 2018
Language: English
Related Journal or Series Information: European Journal of Operational Research
Volume number: 265
Issue number: 2
Start page: 655
End page: 672
Number of pages: 18
ISSN: 0377-2217
eISSN: 1872-6860
JUFO-Level of this publication: 2
Open Access: Not an Open Access publication

Abstract

This paper compares the efficacy of four multicriteria decision-making
(MCDM) methods in identifying the future best-performing stocks in two
comprehensive samples of U.S. stocks. This is the first time that
median-scaling (MS), the Technique for Order Preference by Similarity to
an Ideal Solution (TOPSIS), the Analytic Hierarchy Process (AHP), and
the additive Data Envelopment Analysis (add.DEA) have been used to
combine value and momentum indicators into a single efficiency score.
The results show that the MCDM methods examined can successfully be
applied to equity portfolio selection. As a robustness check, we repeat
all the main sample tests for the sample of the largest-cap stocks
included in the two biggest size quintiles (i.e., stocks above 40% NYSE
market-cap breakpoint) and find that the overall results are
surprisingly robust to size effect. However, the best-performing
portfolios formed on the basis of different MCDM methods have remarkably
different exposures to the style factors that are commonly used to
explain the abnormal returns of active equity portfolios. As a practical
implication of this study, investors following certain investing styles
could take these different style exposures into account when choosing
the MCDM criteria that best fit their portfolio-selection purposes.


Last updated on 2017-06-11 at 15:20