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Robust conditional expectation reward–risk performance measures

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  • Kouaissah, Noureddine

Abstract

In this paper, we develop robust portfolio optimization models for conditional expectation type reward–risk performance measures that significantly improve upon conventional portfolio selection techniques. In particular, we directly address estimation error in the portfolio optimization process by adopting a robust optimization method that is typically used with conventional robust statistical estimation techniques. Alongside this robust optimization, we propose the use of an early-warning system based on moving averages to predict market crises. Empirical analyses based on the US stock market validate the proposed robust approaches and highlight the implications of financial crises for portfolio selection problems. The results confirm that the proposed robust portfolio optimization models substantially improve upon their conventional counterparts for out-of-sample portfolios, providing valuable managerial insights.

Suggested Citation

  • Kouaissah, Noureddine, 2021. "Robust conditional expectation reward–risk performance measures," Economics Letters, Elsevier, vol. 202(C).
    • Handle: RePEc:eee:ecolet:v:202:y:2021:i:c:s016517652100104x
    DOI: 10.1016/j.econlet.2021.109827
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    Cited by:

    1. Alireza Ghahtarani & Ahmed Saif & Alireza Ghasemi, 2022. "Robust portfolio selection problems: a comprehensive review," Operational Research, Springer, vol. 22(4), pages 3203-3264, September.

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    More about this item

    Keywords

    Portfolio selection; Robust portfolio optimization; KOT and JTOK performance measures; Early-warning system;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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