Robust portfolio optimization with a hybrid heuristic algorithm
AbstractEstimation errors in both the expected returns and the covariance matrix hamper the constructing of reliable portfolios within the Markowitz framework. Robust techniques that incorporate the uncertainty about the unknown parameters are suggested in the literature. We propose a modification as well as an extension of such a technique and compare both with another robust approach. In order to eliminate oversimplifications of Markowitzâ portfolio theory, we generalize the optimization framework to better emulate a more realistic investment environment. Because the adjusted optimization problem is no longer solvable with standard algorithms, we employ a hybrid heuristic to tackle this problem. Our empirical analysis is conducted with a moving time window for returns of the German stock index DAX100. The results of all three robust approaches yield more stable portfolio compositions than those of the original Markowitz framework. Moreover, the out-of-sample risk of the robust approaches is lower and less volatile while their returns are not necessarily smaller.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Computational Management Science.
Volume (Year): 9 (2012)
Issue (Month): 1 (February)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=111894
Other versions of this item:
- Björn Fastrich & Peter Winker, 2010. "Robust Portfolio Optimization with a Hybrid Heuristic Algorithm," Working Papers 041, COMISEF.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gianfranco Guastaroba & Renata Mansini & M. Speranza, 2009. "Models and Simulations for Portfolio Rebalancing," Computational Economics, Society for Computational Economics, vol. 33(3), pages 237-262, April.
- Peter Winker & Marianna Lyra & Chris Sharpe, 2008. "Least Median of Squares Estimation by Optimization Heuristics with an Application to the CAPM and Multi Factor Models," Working Papers 006, COMISEF.
- Manfred Gilli & Enrico Schumann, 2009. "Optimal enough?," Working Papers 010, COMISEF.
- Ilir Roko & Manfred Gilli, .
"Using Economic and Financial Information for Stock Selection,"
Swiss Finance Institute Research Paper Series
06-21, Swiss Finance Institute.
- I. Roko & M. Gilli, 2008. "Using economic and financial information for stock selection," Computational Management Science, Springer, vol. 5(4), pages 317-335, October.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Bjoern Fastrich & Sandra Paterlini & Peter Winker, 2011.
"Cardinality versus q-Norm Constraints for Index Tracking,"
Center for Economic Research (RECent)
056, University of Modena and Reggio E., Dept. of Economics.
- Bjöern Fastrich & Sandra Paterlini & Peter Winker, 2011. "Cardinality versus q-Norm Constraints for Index Tracking," Department of Economics 0642, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
- Marianna Lyra, 2010. "Heuristic Strategies in Finance – An Overview," Working Papers 045, COMISEF.
- Akiko Takeda & Mahesan Niranjan & Jun-ya Gotoh & Yoshinobu Kawahara, 2013. "Simultaneous pursuit of out-of-sample performance and sparsity in index tracking portfolios," Computational Management Science, Springer, vol. 10(1), pages 21-49, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.