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International portfolio management with affine policies

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  • Fonseca, Raquel J.
  • Rustem, Berç

Abstract

While dynamic decision making has traditionally been represented as scenario trees, these may become severely intractable and difficult to compute with an increasing number of time periods. We present an alternative tractable approach to multiperiod international portfolio optimization based on an affine dependence between the decision variables and the past returns. Because local asset and currency returns are modeled separately, the original model is non-linear and non-convex. With the aid of robust optimization techniques, however, we develop a tractable semidefinite programming formulation of our model, where the uncertain returns are contained in an ellipsoidal uncertainty set. We add to our formulation the minimization of the worst case value-at-risk and show the close relationship with robust optimization. Numerical results demonstrate the potential gains from considering a dynamic multiperiod setting relative to a single stage approach.

Suggested Citation

  • Fonseca, Raquel J. & Rustem, Berç, 2012. "International portfolio management with affine policies," European Journal of Operational Research, Elsevier, vol. 223(1), pages 177-187.
  • Handle: RePEc:eee:ejores:v:223:y:2012:i:1:p:177-187
    DOI: 10.1016/j.ejor.2012.06.001
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    References listed on IDEAS

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    1. Huang, Dashan & Zhu, Shushang & Fabozzi, Frank J. & Fukushima, Masao, 2010. "Portfolio selection under distributional uncertainty: A relative robust CVaR approach," European Journal of Operational Research, Elsevier, vol. 203(1), pages 185-194, May.
    2. Raquel Fonseca & Wolfram Wiesemann & Berç Rustem, 2012. "Robust international portfolio management," Computational Management Science, Springer, vol. 9(1), pages 31-62, February.
    3. Gulpinar, Nalan & Rustem, Berc, 2007. "Worst-case robust decisions for multi-period mean-variance portfolio optimization," European Journal of Operational Research, Elsevier, vol. 183(3), pages 981-1000, December.
    4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    5. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
    6. Topaloglou, Nikolas & Vladimirou, Hercules & Zenios, Stavros A., 2002. "CVaR models with selective hedging for international asset allocation," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1535-1561, July.
    7. Topaloglou, Nikolas & Vladimirou, Hercules & Zenios, Stavros A., 2008. "A dynamic stochastic programming model for international portfolio management," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1501-1524, March.
    8. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    9. 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.
    10. Rocha, Paula & Kuhn, Daniel, 2012. "Multistage stochastic portfolio optimisation in deregulated electricity markets using linear decision rules," European Journal of Operational Research, Elsevier, vol. 216(2), pages 397-408.
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    Cited by:

    1. Liu, Yong-Jun & Zhang, Wei-Guo, 2015. "A multi-period fuzzy portfolio optimization model with minimum transaction lots," European Journal of Operational Research, Elsevier, vol. 242(3), pages 933-941.
    2. repec:spr:annopr:v:266:y:2018:i:1:d:10.1007_s10479-017-2573-5 is not listed on IDEAS
    3. Kamil J. Mizgier & Joseph M. Pasia, 2016. "Multiobjective optimization of credit capital allocation in financial institutions," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 24(4), pages 801-817, December.
    4. repec:spr:coopap:v:70:y:2018:i:1:d:10.1007_s10589-017-9974-x is not listed on IDEAS

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