IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v176y2010i1p191-22010.1007-s10479-009-0515-6.html
   My bibliography  Save this article

Robust portfolios: contributions from operations research and finance

Author

Listed:
  • Frank Fabozzi
  • Dashan Huang
  • Guofu Zhou

Abstract

In this paper we provide a survey of recent contributions to robust portfolio strategies from operations research and finance to the theory of portfolio selection. Our survey covers results derived not only in terms of the standard mean-variance objective, but also in terms of two of the most popular risk measures, mean-VaR and mean-CVaR developed recently. In addition, we review optimal estimation methods and Bayesian robust approaches. Copyright Springer Science+Business Media, LLC 2010

Suggested Citation

  • Frank Fabozzi & Dashan Huang & Guofu Zhou, 2010. "Robust portfolios: contributions from operations research and finance," Annals of Operations Research, Springer, vol. 176(1), pages 191-220, April.
  • Handle: RePEc:spr:annopr:v:176:y:2010:i:1:p:191-220:10.1007/s10479-009-0515-6
    DOI: 10.1007/s10479-009-0515-6
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10479-009-0515-6
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s10479-009-0515-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Frittelli, Marco & Rosazza Gianin, Emanuela, 2002. "Putting order in risk measures," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1473-1486, July.
    2. Gordon J. Alexander & Alexandre M. Baptista, 2004. "A Comparison of VaR and CVaR Constraints on Portfolio Selection with the Mean-Variance Model," Management Science, INFORMS, vol. 50(9), pages 1261-1273, September.
    3. Isaac Kleshchelski & Nicolas Vincent, 2007. "Robust Equilibrium Yield Curves," Cahiers de recherche 08-02, HEC Montréal, Institut d'économie appliquée.
    4. Hall, Joyce A. & Brorsen, B. Wade & Irwin, Scott H., 1989. "The Distribution of Futures Prices: A Test of the Stable Paretian and Mixture of Normals Hypotheses," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(1), pages 105-116, March.
    5. Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, vol. 3(3), pages 215-231, June.
    6. MacKinlay, A Craig & Pastor, Lubos, 2000. "Asset Pricing Models: Implications for Expected Returns and Portfolio Selection," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 883-916.
    7. Sergio Ortobelli & Svetlozar T. Rachev & Stoyan Stoyanov & Frank J. Fabozzi & Almira Biglova, 2005. "The Proper Use Of Risk Measures In Portfolio Theory," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(08), pages 1107-1133.
    8. Stambaugh, Robert F., 1997. "Analyzing investments whose histories differ in length," Journal of Financial Economics, Elsevier, vol. 45(3), pages 285-331, September.
    9. R.H. Tütüncü & M. Koenig, 2004. "Robust Asset Allocation," Annals of Operations Research, Springer, vol. 132(1), pages 157-187, November.
    10. Alexander, Gordon J. & Baptista, Alexandre M., 2002. "Economic implications of using a mean-VaR model for portfolio selection: A comparison with mean-variance analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1159-1193, July.
    11. Kandel, Shmuel & Stambaugh, Robert F, 1996. "On the Predictability of Stock Returns: An Asset-Allocation Perspective," Journal of Finance, American Finance Association, vol. 51(2), pages 385-424, June.
    12. 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.
    13. S. V. Stoyanov & S. T. Rachev & F. J. Fabozzi, 2007. "Optimal Financial Portfolios," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(5), pages 401-436.
    14. Kan, Raymond & Zhou, Guofu, 2007. "Optimal Portfolio Choice with Parameter Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(3), pages 621-656, September.
    15. Raman Uppal & Tan Wang, 2003. "Model Misspecification and Underdiversification," Journal of Finance, American Finance Association, vol. 58(6), pages 2465-2486, December.
    16. Yacine AÏT‐SAHALI & Michael W. Brandt, 2001. "Variable Selection for Portfolio Choice," Journal of Finance, American Finance Association, vol. 56(4), pages 1297-1351, August.
    17. Karthik Natarajan & Dessislava Pachamanova & Melvyn Sim, 2008. "Incorporating Asymmetric Distributional Information in Robust Value-at-Risk Optimization," Management Science, INFORMS, vol. 54(3), pages 573-585, March.
    18. Yihong Xia, 2001. "Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," Journal of Finance, American Finance Association, vol. 56(1), pages 205-246, February.
    19. Pastor, Lubos & Stambaugh, Robert F., 2000. "Comparing asset pricing models: an investment perspective," Journal of Financial Economics, Elsevier, vol. 56(3), pages 335-381, June.
    20. Rustem, Berc & Becker, Robin G. & Marty, Wolfgang, 2000. "Robust min-max portfolio strategies for rival forecast and risk scenarios," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1591-1621, October.
    21. Basak, Suleyman & Shapiro, Alexander, 2001. "Value-at-Risk-Based Risk Management: Optimal Policies and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 371-405.
    22. Massimo Guidolin & Allan Timmermann, 2008. "International asset allocation under regime switching, skew, and kurtosis preferences," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 889-935, April.
    23. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    24. Ledoit, Olivier & Wolf, Michael, 2003. "Improved estimation of the covariance matrix of stock returns with an application to portfolio selection," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 603-621, December.
    25. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
    26. Doron Avramov, 2004. "Stock Return Predictability and Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 699-738.
    27. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(3), pages 279-292, September.
    28. Jorion, Philippe, 1991. "Bayesian and CAPM estimators of the means: Implications for portfolio selection," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 717-727, June.
    29. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    30. Shen, Ruijun & Zhang, Shuzhong, 2008. "Robust portfolio selection based on a multi-stage scenario tree," European Journal of Operational Research, Elsevier, vol. 191(3), pages 864-887, December.
    31. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
    32. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
    33. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    34. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
    35. Laurent El Ghaoui & Maksim Oks & Francois Oustry, 2003. "Worst-Case Value-At-Risk and Robust Portfolio Optimization: A Conic Programming Approach," Operations Research, INFORMS, vol. 51(4), pages 543-556, August.
    36. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    37. Ioana Popescu, 2007. "Robust Mean-Covariance Solutions for Stochastic Optimization," Operations Research, INFORMS, vol. 55(1), pages 98-112, February.
    38. Svetlozar Rachev & Sergio Ortobelli & Stoyan Stoyanov & Frank J. Fabozzi & Almira Biglova, 2008. "Desirable Properties Of An Ideal Risk Measure In Portfolio Theory," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 19-54.
    39. Tu, Jun & Zhou, Guofu, 2004. "Data-generating process uncertainty: What difference does it make in portfolio decisions?," Journal of Financial Economics, Elsevier, vol. 72(2), pages 385-421, May.
    40. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    41. Huang, Dashan & Zhu, Shu-Shang & Fabozzi, Frank J. & Fukushima, Masao, 2008. "Portfolio selection with uncertain exit time: A robust CVaR approach," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 594-623, February.
    42. Martin R. Young, 1998. "A Minimax Portfolio Selection Rule with Linear Programming Solution," Management Science, INFORMS, vol. 44(5), pages 673-683, May.
    43. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, February.
    44. A. Ben-Tal & A. Nemirovski, 1998. "Robust Convex Optimization," Mathematics of Operations Research, INFORMS, vol. 23(4), pages 769-805, November.
    45. D. Goldfarb & G. Iyengar, 2003. "Robust Portfolio Selection Problems," Mathematics of Operations Research, INFORMS, vol. 28(1), pages 1-38, February.
    46. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    47. Dong‐Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 1999. "Optimal Risk Management Using Options," Journal of Finance, American Finance Association, vol. 54(1), pages 359-375, February.
    48. Hans Föllmer & Alexander Schied, 2002. "Convex measures of risk and trading constraints," Finance and Stochastics, Springer, vol. 6(4), pages 429-447.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Penaranda, Francisco, 2007. "Portfolio choice beyond the traditional approach," LSE Research Online Documents on Economics 24481, London School of Economics and Political Science, LSE Library.
    2. Alireza Ghahtarani & Ahmed Saif & Alireza Ghasemi, 2021. "Robust Portfolio Selection Problems: A Comprehensive Review," Papers 2103.13806, arXiv.org.
    3. Doron Avramov & Guofu Zhou, 2010. "Bayesian Portfolio Analysis," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 25-47, December.
    4. Panos Xidonas & Ralph Steuer & Christis Hassapis, 0. "Robust portfolio optimization: a categorized bibliographic review," Annals of Operations Research, Springer, vol. 0, pages 1-20.
    5. Panos Xidonas & Ralph Steuer & Christis Hassapis, 2020. "Robust portfolio optimization: a categorized bibliographic review," Annals of Operations Research, Springer, vol. 292(1), pages 533-552, September.
    6. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    7. Tu, Jun & Zhou, Guofu, 2010. "Incorporating Economic Objectives into Bayesian Priors: Portfolio Choice under Parameter Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(4), pages 959-986, August.
    8. Jang Ho Kim & Woo Chang Kim & Frank J. Fabozzi, 2014. "Recent Developments in Robust Portfolios with a Worst-Case Approach," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 103-121, April.
    9. Lubos Pastor & Pietro Veronesi, 2009. "Learning in Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 361-381, November.
    10. Frank Lutgens & Jos Sturm & Antoon Kolen, 2006. "Robust One-Period Option Hedging," Operations Research, INFORMS, vol. 54(6), pages 1051-1062, December.
    11. DeMiguel, Victor & Martin-Utrera, Alberto & Nogales, Francisco J., 2013. "Size matters: Optimal calibration of shrinkage estimators for portfolio selection," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3018-3034.
    12. Yuanyuan Zhang & Xiang Li & Sini Guo, 2018. "Portfolio selection problems with Markowitz’s mean–variance framework: a review of literature," Fuzzy Optimization and Decision Making, Springer, vol. 17(2), pages 125-158, June.
    13. Maria Scutellà & Raffaella Recchia, 2013. "Robust portfolio asset allocation and risk measures," Annals of Operations Research, Springer, vol. 204(1), pages 145-169, April.
    14. David Stefanovits & Urs Schubiger & Mario V. Wüthrich, 2014. "Model Risk in Portfolio Optimization," Risks, MDPI, Open Access Journal, vol. 2(3), pages 1-34, August.
    15. 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.
    16. Johannes Bock, 2018. "An updated review of (sub-)optimal diversification models," Papers 1811.08255, arXiv.org.
    17. Plachel, Lukas, 2019. "A unified model for regularized and robust portfolio optimization," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).
    18. Tu, Jun & Zhou, Guofu, 2011. "Markowitz meets Talmud: A combination of sophisticated and naive diversification strategies," Journal of Financial Economics, Elsevier, vol. 99(1), pages 204-215, January.
    19. Schanbacher Peter, 2015. "Averaging Across Asset Allocation Models," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 235(1), pages 61-81, February.
    20. Detlef Seese & Christof Weinhardt & Frank Schlottmann (ed.), 2008. "Handbook on Information Technology in Finance," International Handbooks on Information Systems, Springer, number 978-3-540-49487-4, Fall.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:176:y:2010:i:1:p:191-220:10.1007/s10479-009-0515-6. 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: . General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.