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Robust Bayesian portfolio optimization

Author

Listed:
  • Zapata Quimbayo, Carlos Andres
  • Carmona Espejo, Diego Felipe
  • Gamboa Hidalgo, Jhonatan

Abstract

We propose a robust Bayesian model using the normal-inverse-Wishart and Gamma distributions for an investment portfolio consisting of the stocks of the United States Dow Jones Industrial Index. To this end, the Bayesian approach and the robust portfolio model are integrated to determine the uncertainty of the estimated parameters in expected returns and covariances using ellipsoidal or quadratic type uncertainty sets. The results show that the proposed method exhibits better performance and diversification than the traditional mean-variance model as well as the robust portfolios.

Suggested Citation

  • Zapata Quimbayo, Carlos Andres & Carmona Espejo, Diego Felipe & Gamboa Hidalgo, Jhonatan, 2025. "Robust Bayesian portfolio optimization," International Review of Financial Analysis, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925003023
    DOI: 10.1016/j.irfa.2025.104215
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    More about this item

    Keywords

    Optimal portfolio; Robust optimization; Uncertainty sets;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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