International portfolio management with affine policies
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.
References listed on IDEAS
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.:
- 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.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- 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.
- 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.
- 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.
- 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.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Raquel J. Fonseca & Wolfram Wiesemann & Berc Rustem, 2010.
"Robust International Portfolio Management,"
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:223:y:2012:i:1:p:177-187. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.