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Two-stage portfolio optimization with higher-order conditional measures of risk

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  • Sıtkı Gülten

    ()

  • Andrzej Ruszczyński

    ()

Abstract

We describe a study of application of novel risk modeling and optimization techniques to daily portfolio management. In the first part of the study, we develop and compare specialized methods for scenario generation and scenario tree construction. In the second part, we construct a two-stage stochastic programming problem with conditional measures of risk, which is used to re-balance the portfolio on a rolling horizon basis, with transaction costs included in the model. In the third part, we present an extensive simulation study on real-world data of several versions of the methodology. We show that two-stage models outperform single-stage models in terms of long-term performance. We also show that using high-order risk measures is superior to first-order measures. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Sıtkı Gülten & Andrzej Ruszczyński, 2015. "Two-stage portfolio optimization with higher-order conditional measures of risk," Annals of Operations Research, Springer, vol. 229(1), pages 409-427, June.
  • Handle: RePEc:spr:annopr:v:229:y:2015:i:1:p:409-427:10.1007/s10479-014-1768-2
    DOI: 10.1007/s10479-014-1768-2
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    References listed on IDEAS

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    1. Marco Frittelli & Giacomo Scandolo, 2006. "Risk Measures And Capital Requirements For Processes," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 589-612, October.
    2. Andrzej Ruszczyński & Alexander Shapiro, 2006. "Conditional Risk Mappings," Mathematics of Operations Research, INFORMS, vol. 31(3), pages 544-561, August.
    3. Matmoura, Yassine & Penev, Spiridon, 2013. "Multistage optimization of option portfolio using higher order coherent risk measures," European Journal of Operational Research, Elsevier, vol. 227(1), pages 190-198.
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    6. Andrzej Ruszczynski & Robert J. Vanderbei, 2003. "Frontiers of Stochastically Nondominated Portfolios," Econometrica, Econometric Society, vol. 71(4), pages 1287-1297, July.
    7. Georg Ch Pflug & Werner Römisch, 2007. "Modeling, Measuring and Managing Risk," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6478, October.
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    11. Naomi Miller & Andrzej Ruszczyński, 2011. "Risk-Averse Two-Stage Stochastic Linear Programming: Modeling and Decomposition," Operations Research, INFORMS, vol. 59(1), pages 125-132, February.
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