Neural network-based mean-variance-skewness model for portfolio selection

  • Authors:

  • Lean Yu;Shouyang Wang;Kin Keung Lai

  • Affiliations:

  • Institute of Systems Science, Academy of Mathematics and Systems Sciences, Chinese Academy of Sciences, Beijing 100080, China and School of Management, Graduate School of Chinese Academy of Scienc ...;Institute of Systems Science, Academy of Mathematics and Systems Sciences, Chinese Academy of Sciences, Beijing 100080, China and School of Management, Graduate School of Chinese Academy of Scienc ...;College of Business Administration, Hunan University, Changsha 410082, China and Department of Management Sciences, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong

  • Venue:
  • Computers and Operations Research
  • Year:
  • 2008

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Abstract

In this study, a novel neural network-based mean-variance-skewness model for optimal portfolio selection is proposed integrating different forecasts and trading strategies, as well as investors' risk preference. Based on the Lagrange multiplier theory in optimization and the radial basis function (RBF) neural network, the model seeks to provide solutions satisfying the trade-off conditions of mean-variance-skewness. The feasibility of the RBF network-based mean-variance-skewness model is verified with a simulation experiment. The experimental results show that, for all examined investor risk preferences and investment assets, the proposed model is a fast and efficient way of solving the trade-off in the mean-variance-skewness portfolio problem. In addition, we also find that the proposed approach can also be used as an alternative tool for evaluating various forecasting models.