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Stability advances in robust portfolio optimization under parallelepiped uncertainty

Kara, Güray; Özmen, Ayşe; Weber, Gerhard-Wilhelm
Journal article, Peer reviewed
Accepted version
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URI
http://hdl.handle.net/11250/2492740
Date
2017
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  • Institutt for industriell økonomi og teknologiledelse [1938]
  • Publikasjoner fra CRIStin - NTNU [20955]
Original version
Central European Journal of Operations Research. 2017, 1-21.   10.1007/s10100-017-0508-5
Abstract
In financial markets with high uncertainties, the trade-off between maximizing expected return and minimizing the risk is one of the main challenges in modeling and decision making. Since investors mostly shape their invested amounts towards certain assets and their risk aversion level according to their returns, scientists and practitioners have done studies on that subject since the beginning of the stock markets’ establishment. In this study, we model a Robust Optimization problem based on data. We found a robust optimal solution to our portfolio optimization problem. This approach includes the use of Robust Conditional Value-at-Risk under Parallelepiped Uncertainty, an evaluation and a numerical finding of the robust optimal portfolio allocation. Then, we trace back our robust linear programming model to the Standard Form of a Linear Programming model; consequently, we solve it by a well-chosen algorithm and software package. Uncertainty in parameters, based on uncertainty in the prices, and a risk-return analysis are crucial parts of this study. A numerical experiment and a comparison (back testing) application are presented, containing real-world data from stock markets as well as a simulation study. Our approach increases the stability of portfolio allocation and reduces the portfolio risk.
Publisher
Springer Verlag
Journal
Central European Journal of Operations Research

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