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Kernel density estimation based distributionally robust mean-CVaR portfolio optimization

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Listed:
  • Wei Liu

    (Beijing Normal University
    Dalian University of Technology)

  • Li Yang

    (Dalian University of Technology)

  • Bo Yu

    (Dalian University of Technology)

Abstract

In this paper, by using weighted kernel density estimation (KDE) to approximate the continuous probability density function (PDF) of the portfolio loss, and to compute the corresponding approximated Conditional Value-at-Risk (CVaR), a KDE-based distributionally robust mean-CVaR portfolio optimization model is investigated. Its distributional uncertainty set (DUS) is defined indirectly by imposing the constraint on the weights in weighted KDE in terms of $$\phi $$ ϕ -divergence function in order that the corresponding infinite-dimensional space of PDF is converted into the finite-dimensional space on the weights. This makes the corresponding distributionally robust optimization (DRO) problem computationally tractable. We also prove that the optimal value and solution set of the KDE-based DRO problem converge to those of the portfolio optimization problem under the true distribution. Primary empirical test results show that the proposed model is meaningful.

Suggested Citation

  • Wei Liu & Li Yang & Bo Yu, 2022. "Kernel density estimation based distributionally robust mean-CVaR portfolio optimization," Journal of Global Optimization, Springer, vol. 84(4), pages 1053-1077, December.
    • Handle: RePEc:spr:jglopt:v:84:y:2022:i:4:d:10.1007_s10898-022-01177-5
    DOI: 10.1007/s10898-022-01177-5
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    References listed on IDEAS

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