Investing in Emerging Markets: Contrasted Mean and Median Models in Egyptian Stock Markets
Investing in Emerging Markets: Contrasted Mean and Median Models in Egyptian Stock Markets

Author(s): Mai A. Ibrahim, Mohammed El-Beltagy, Motaz Khorshid
Subject(s): Methodology and research technology, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: Emerging markets; higher moment models; median models; mixed-Integer linear programming; non-Linear programming;
Summary/Abstract: Emerging Markets return distributions have shown significance departure from normality were they are characterized by fatter tails relative to the normal distribution and exhibit levels of skewness and kurtosis that constitute a significant departure from normality. Therefore the classical Markowitz Mean-Variance is not the most suitable portfolio optimization model to apply for emerging markets since it assumes normally distributed returns and a quadratic utility function. Alternative models were suggested in the literature, higher moments models have been introduced to account for the insufficiency of the description of a portfolio by only its first two moments while the median model has been introduced as a robust statistic which is less affected by outliers than the mean. Alternative risk measures have been introduced instead of variance to capture the effect of risk. The purpose of this paper is to investigate the performance of different portfolio models in an emerging market such as the Egyptian Market to decide which can suit better the characteristics of this market. Higher moment models including Mean-Variance-Skewness and Mean-Variance-Skewness-Kurtosis and median models including Median Value-at-Risk and Median Mean-Absolute-Deviation are compared to the Markowitz model. The formulation of the models varied between single-objective nonlinear programming problems (NLP), single-objective mixed-integer linear programming (MILP) problems and single-objective quadratic programming problems. All the models are tested on real financial data in the Egyptian main Index EGX30. In general, median models have shown better performance than higher moments models and specifically the MedianVaR model. The MedianVaR model has provided the higher final wealth for the investor over the entire period of study. These findings can guide the decision making process for portfolio optimization in the Egyptian market were one can barely find any study on the portfolio optimization problem for the Egyptian Market in specific and the MENA region in general.

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