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Modeling portfolio efficiency using stochastic optimization with incomplete information and partial uncertainty

Author

Listed:
  • D. Torre

    (Université Côte d’Azur)

  • F. Mendivil

    (Acadia University)

  • M. Rocca

    (Universitá degli Studi dell’Insubria)

Abstract

Efficiency plays a crucial role in portfolio optimization. This notion is formulated by means of stochastic optimization techniques. Very often this problem is subject to partial uncertainty or incomplete information on the probability distribution and on the preferences expressed by means of the utility function. In this case both the objective function and the underlying probability measure are not known with precision. To address this kind of issues, we propose to model the notion of incomplete information by means of set-valued analysis and, therefore, we propose two different extensions of the classical model. In the first one we rely on the notion of set-valued function while the second one utilizes the notion of set-valued probability. For both of them we investigate stability properties. These results are also linked to the notion of robustness of the aforementioned problem. Finally we apply the obtained results to portfolio theory and stochastic dominance.

Suggested Citation

  • D. Torre & F. Mendivil & M. Rocca, 2024. "Modeling portfolio efficiency using stochastic optimization with incomplete information and partial uncertainty," Annals of Operations Research, Springer, vol. 334(1), pages 241-263, March.
    • Handle: RePEc:spr:annopr:v:334:y:2024:i:1:d:10.1007_s10479-021-04372-x
    DOI: 10.1007/s10479-021-04372-x
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