IDEAS home Printed from https://ideas.repec.org/p/drm/wpaper/2011-1.html
   My bibliography  Save this paper

Asset Allocation with Aversion to Parameter Uncertainty: A Minimax Regression Approach

Author

Listed:
  • Sessi Topkavi

Abstract

This paper takes a minimax regression approach to incorporate aversion to parameter uncertainty into the mean-variance model. The uncertainty-averse minimax mean-variance portfolio is obtained by minimizing with respect to the unknown weights the upper bound of the usual quadratic risk function over a fuzzy ellipsoidal set. Beyond the existing approaches, our methodology offers three main advantages: first, the resulting optimal portfolio can be interpreted as a Bayesian mean-variance portfolio with the least favorable prior density, and this result allows for a comprehensive comparison with traditional uncertainty-neutral Bayesian mean-variance portfolios. Second, the minimax mean-variance portfolio has a shrinkage expression, but its performance does not necessarily lie within those of the two reference portfolios. Third, we provide closed form expressions for the standard errors of the minimax mean-variance portfolio weights and statistical significance of the optimal portfolio weights can be easily conducted. Empirical applications show that incorporating aversion to parameter uncertainty leads to more stable optimal portfolios that outperform traditional uncertainty-neutral Bayesian mean-variance portfolios.

Suggested Citation

  • Sessi Topkavi, 2011. "Asset Allocation with Aversion to Parameter Uncertainty: A Minimax Regression Approach," EconomiX Working Papers 2011-1, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2011-1
    as

    Download full text from publisher

    File URL: http://economix.fr/pdf/dt/2011/WP_EcoX_2011-01.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Alain Béraud & Gilbert Faccarello, 2000. "Nouvelle histoire de la pensée économique, tome 3," Post-Print halshs-00201476, HAL.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Asset allocation; estimation error; aversion to uncertainty; min-imax regression; Bayesian mean-variance portfolios; least favorable prior;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:drm:wpaper:2011-1. 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: (Valerie Mignon). General contact details of provider: http://edirc.repec.org/data/modemfr.html .

    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.

    We have no references for this item. You can help adding them by using 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.

    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.