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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Enhancing COMFORT with Fractional Difference: An Empirical Study |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 36 |
| Date | 2023 |
| Abstract Text | We study the effect of using fractional returns instead of log returns on improving portfolio optimization. The fractional return is defined as a fractional difference of log prices. The rationale behind the substitution lies in the fractional return’s similarity to log returns and its memory richness nature. We conduct extensive experiments on 8 groups of stocks with Gaussian and COMFORT models, with the optimization objective of maximizing the Sharpe ratio, with or without short-selling. Our findings are the following. First, qualitatively, portfolios using fractional returns behave generally more turbulent. Second, the Sharpe ratio demonstrates a pattern of first increasing and then decreasing with respect to degrees of fractional returns. Third, application of fractional returns yields improved Sharpe ratios in most groups. Fourth, the improvement effect is greater for portfolios with short selling. We also give an interpretation of the findings and conclude with future directions. |
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