A1 Journal article (refereed), original research
Enhancement of equity portfolio performance using data envelopment analysis

Publication Details
Authors: Pätäri Eero, Leivo Timo, Honkapuro Samuli
Publication year: 2012
Language: English
Related Journal or Series Information: European Journal of Operational Research
Volume number: 220
Issue number: 3
Start page: 786
End page: 797
ISSN: 0377-2217
JUFO-Level of this publication: 2
Open Access: Not an Open Access publication

This paper examines the applicability of data envelopment analysis (DEA) as a basis of selection criteria for equity portfolios. It is the first DEA application for constructing a combined equity investment strategy that aims to integrate the benefits of both value investing and momentum investing. The 3-quantile portfolios are composed of a comprehensive sample of Finnish non-financial stocks based on their DEA efficiency scores that are calculated using three variants of DEA models (the constant returns-to-scale, the super-efficiency, and the cross-efficiency models). The performance of portfolios is evaluated on the basis of the average return and several risk-adjusted performance metrics throughout the 1994-2010 sample period. The results show the capability of the DEA approach to add value to equity portfolio selection. The outperformance of the top 3-quantile DEA portfolios in contrast to both the comparable bottom portfolio and the stock market average is statistically significant on the basis of all performance measures employed. The outperformance is slightly more significant when the stock price momentum is included in the DEA variables. The methodology employed offers an interesting alternative for detecting the outperforming stocks of the future by capturing both the price momentum and several dimensions of relative value simultaneously. DEA is particularly useful as a multicriteria methodology in cases in which the number of stocks in the sample is large. It therefore also has useful implications to practical portfolio management.

Last updated on 2017-22-03 at 14:31