Journal of Risk and Financial Management Article Transfer Entropy Approach for Portfolio Optimization: An Empirical Approach for CESEE Markets Tihana Škrinjari´c 1,*,† , Derick Quintino 2 and Paulo Ferreira 3,4,5 1 Croatian National Bank, Trg Hrvatskih Velikana 3, 10000 Zagreb, Croatia 2 Department of Economics, Administration and Sociology, University of São Paulo, Piracicaba 13418-900, Brazil;
[email protected] 3 VALORIZA—Research Center for Endogenous Resource Valorization, 7300-555 Portalegre, Portugal;
[email protected] 4 Instituto Politécnico de Portalegre, 7300-110 Portalegre, Portugal 5 CEFAGE-UE, IIFA, Universidade de Évora, Largo dos Colegiais 2, 7000-809 Évora, Portugal * Correspondence:
[email protected] † The author states that the views presented in this paper are those of the authors and not necessarily representing the institution she works at. Abstract: In this paper, we deal with the possibility of using econophysics concepts in dynamic portfolio optimization. The main idea of the research is that combining different methodological aspects in portfolio selection can enhance portfolio performance over time. Using data on CESEE stock market indices, we model the dynamics of entropy transfers from one return series to others. In the second step, the results are utilized in simulating the portfolio strategies that take into account the previous results. Here, the main results indicate that using entropy transfers in portfolio construction Citation: Škrinjari´c,Tihana, Derick and rebalancing has the potential to achieve better portfolio value over time when compared to Quintino, and Paulo Ferreira. 2021. benchmark strategies. Transfer Entropy Approach for Portfolio Optimization: An Empirical Keywords: econophysics; portfolio selection; dynamic analysis; stock markets Approach for CESEE Markets.