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Data-Driven Robust Optimization with Application to Portfolio Management

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  • Selim Mankaï

Abstract

Portfolio optimization results are strongly dependent on the model parameters. To circumvent this shortcoming, this paper proposes a new modeling approach to address data uncertainty. The model offers full control over the degree of conservatism and underlines its interaction with robustness for a range of extreme market situations. Without prior assumptions on data generating process, we develop a probabilistic guarantee on the optimality of the solution. Unlike previous measures that depend solely on the uncertainty model, our measure is also sensitive to the solution and the investment horizon. We provide an example on international stock indexes investment. Computational experiments and ex-post analysis provide evidence for the potential and the effectiveness of our model.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-104.

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Length: 23 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-104

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Related research

Keywords: Portfolio protection; Robust optimization; Multivariate tail dependence; Nonparametric predictive inference.;

This paper has been announced in the following NEP Reports:

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  1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  2. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
  3. Costa, O. L. V. & Paiva, A. C., 2002. "Robust portfolio selection using linear-matrix inequalities," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 889-909, June.
  4. Quaranta, Anna Grazia & Zaffaroni, Alberto, 2008. "Robust optimization of conditional value at risk and portfolio selection," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2046-2056, October.
  5. Gregory, Christine & Darby-Dowman, Ken & Mitra, Gautam, 2011. "Robust optimization and portfolio selection: The cost of robustness," European Journal of Operational Research, Elsevier, vol. 212(2), pages 417-428, July.
  6. Bertsimas, Dimitris & Doan, Xuan Vinh, 2010. "Robust and data-driven approaches to call centers," European Journal of Operational Research, Elsevier, vol. 207(2), pages 1072-1085, December.
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