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Quantile-based optimal portfolio selection

Author

Listed:
  • Taras Bodnar

    (Stockholm University)

  • Mathias Lindholm

    (Stockholm University)

  • Erik Thorsén

    (Stockholm University)

  • Joanna Tyrcha

    (Stockholm University)

Abstract

In this paper the concept of quantile-based optimal portfolio selection is introduced and a specific portfolio connected to it, the conditional value-of-return (CVoR) portfolio, is proposed. The CVoR is defined as the mean excess return or the conditional value-at-risk (CVaR) of the return distribution. The portfolio selection consists solely of quantile-based risk and return measures. Financial institutions that work in the context of Basel 4 use CVaR as a risk measure. In this regulatory framework sufficient and necessary conditions for optimality of the CVoR portfolio are provided under a general distributional assumption. Moreover, it is shown that the CVoR portfolio is mean-variance efficient when the returns are assumed to follow an elliptically contoured distribution. Under this assumption the closed-form expression for the weights and characteristics of the CVoR portfolio are obtained. Finally, the introduced methods are illustrated in an empirical study based on monthly data of returns on stocks included in the S&P index. It is shown that the new portfolio selection strategy outperforms several alternatives in terms of the final investor wealth.

Suggested Citation

  • Taras Bodnar & Mathias Lindholm & Erik Thorsén & Joanna Tyrcha, 2021. "Quantile-based optimal portfolio selection," Computational Management Science, Springer, vol. 18(3), pages 299-324, July.
    • Handle: RePEc:spr:comgts:v:18:y:2021:i:3:d:10.1007_s10287-021-00395-8
    DOI: 10.1007/s10287-021-00395-8
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    References listed on IDEAS

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    3. Taras Bodnar & Dmytro Ivasiuk & Nestor Parolya & Wolfgang Schmid, 2023. "Multi-period power utility optimization under stock return predictability," Computational Management Science, Springer, vol. 20(1), pages 1-27, December.

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