2005. Optimizing Uncertain Multi-Period Portfolios Under a Conditional Value-at-Risk Measure
Invited abstract in session WC-9: Methods and models in portfolio and risk management, stream OR in Finance and Insurance .
Wednesday, 12:30-14:00Room: Clarendon SR 2.01
Authors (first author is the speaker)
| 1. | Julián Benavides
|
| Finance, Universidad Icesi | |
| 2. | Anibal Sosa
|
| Ciencias Fisicas & Exactas, Universidad Icesi | |
| 3. | Andrés Salas
|
| Universidad Icesi |
Abstract
This research develops a multi-period portfolio optimization problem with uncertain share returns (Liu, 2007). Our procedure is novel because we use conditional value-at-risk (CVaR) as a risk measure and develop appropriate expressions for it. CVaR is a more effective risk measure than standard deviation at capturing tail risk and extreme losses.
The model includes different constraints, such as bankruptcy, liquidity, diversification, and no short-selling. Importantly, all prior research assumes that the uncertain returns do not affect the self-financing constraint, implicitly considering that trading fees apply to portfolio weights instead of the investment value. Our model improves that perspective by developing a restriction that applies to the investment value.
We surveyed ten postgraduate finance students to develop the uncertainty distribution of the portfolio shares.
Tests of this approach versus a multiperiod Markowitz model yield interesting insights about weight stability and tail risk.
Keywords
- Finance and Banking
- Financial Modelling
- Optimization in Financial Mathematics
Status: accepted
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