Mean-variance-instability portfolio analysis: A case of Taiwan’s stock market

This paper applies Talpaz, Harpaz, and Penson’s (THP) mean-variance-instability portfolio selection model to eight selected Taiwan stocks during 1980-89 to demonstrate how instability preference effects the traditional mean-variance frontier. In contrast to THP’s finding, the empirical results show that Taiwan’s high-frequency stocks have high, now low, variance. This indicates that Taiwan investors, unlike U.S. investors, prefer to speculate in high-variance stocks. The empirical results also show that short selling may increase the risk of the portfolio when the investor is instability preferred.