Robust Portfolio Optimization using Contamination Technique

Hassanlou, Khadijeh

Robust Portfolio Optimization using Contamination Technique

Document Type : applied

Author

Khadijeh Hassanlou

Assistant Prof., Faculty of Engineering, Khatam University, Tehran, Iran.

Abstract

In this paper the robust optimization is used for portfolio opimization problem. using estimates in the portfolio optimization process, will cause estimation risk. Therefore, methods should be used that have ability to decrease estimation risk and robust optimization can be one of the proper methods in addressing uncertainty. In this research the contamination technique is used for assessing robustness of portfolio. Due to sharp icrease in Iran stock exchange indexes in 2013, this technique is used and these sharp changes are intered in model as contamination scenarios. It is assumed that the probability distribution of return has fluctuated then the effects of this fluctuation on optimal portfolio are discussed. Conditional Value at Risk is used for measuring the risk of portfolio. Portfolio robustness and sensitivity analysis showed that the probability of contamination scenario affects the function of minimum risk so it needs to be controlled. Finally after efficiency test of given portfolio showed that it is not efficient therefore the new one with less risk is determined.
JEL: C61, G11
How to cite this paper: Hassanlou, K. (2016). Robust Portfolio Optimization using Contamination Technique. Quarterly Journal of Risk Modeling and Financial Engineering, 1(1), 76–96. (In Persian)

Keywords

Main Subjects

OPTIMIZATION METHODS AND ASSET ALOCATION

References

Bertsimas,D., & Browny, D.(2007). Theory and Applications of Robust Optimization.Constantine Caramanisz.July 6.

Bertsimas, D., & Sim, M. (2004). The Price of Robustness. Operations Research, 52(1), 35–53.

Black, F., & Litterman, F. (1991). Asset Allocation: Combining Investors Views with Market Equilibrium. Journal of Fixed Income, September, 7–18.

Chopra, V. K., & Ziemba, T. (1993).The Effect of Errors in Means, Variances, and Covariances on Optimal Portfolio Choice No Access, Journal of Portfolio Management 19(2),6-11.

DeMiguel, V., & Nogales, F. J. (2009). Portfolio Selection with Robust Estimation.OR, 57(3), 560–577.

Dupačová, J., & Kopa, M. (2012). Robustness in Stochastic Programs with Risk Constraints. Annals of Operations Research, 200(1),55–74.

Dupacova, J. S.(2006). Tress Testing Via Contamination.Charles University, Faculty of Mathematics and Physics.

Dupacova, J., & Kopa, M. (2013). Robustness of Optimal Portfolios Under Risk and Stochastic Dominance Constraints.

Dupacova, J.(2008). Risk Objectives in Two-stage Stochastic Programming Models. Kybernetika, 44(2), 227-242.

Dupacova, J., & Polivka, J. (2005). Stress Testing for VAR and CVAR. Probability and Math. Statistics, Charles University, Prague, Czech Republic.

Ghahtarani, A., & Najafi, A. (2013). Robust Goal Programming for Multi-objective Portfolio Selection Problem. Economic Modelling ,33(C), 588–592.

Green, R. C., & Hollifield, B. (1992). When Will Mean-variance Efficient Portfolios be Well Diversified?. Journal of Finance,47(5), 1785-1809.

Gregory, ch., Darby, K., & Mitra, G. (2011). Robust Optimization and Portfolio Selection. The Cost of Robustness. Oper Res, 212(2), 417-428.

Kopa, M. (2010). Measuring of Second–order Stochastic Dominance Portfolio Efficiency. Kybernetika, 46(3), 488-500.

Kopa, M., & Chovanec, P. (2008), A second–oderstochasticdominance portfolioefficiencymeasure. Kybernetika, 4(2), 243-258.

Kushch, P.(2012). Portfolio optimization with robust Mean-Variance and Mean-Conditional Value at Risk strategies. Spring. Umea University.Department of Economics Degree project, 30 hp

Lee, S. M., & Chesser, D. L. (1980). Goal programming for portfolio selection. The Journal of Portfolio Management, 6(3), 22-26.

Markowits, H. (1952).portfolio selection. Therand corporation. The Journal of Finance, Vol. 7(1), pp. 77-91.

Michaud, R. (2008). Estimation Error and Portfolio Optimization: A Resampling Solution. Journal of Invesrment Management, 6(1), 8–28.

Rockafellar, R. T., & Uryasev, S. (2000). Optimization of conditional value at risk.Journal of risk.spring, 2(3), 21-41.

Salahi, M., Mehrdoust, F., & Piri, F. (2013). CVaR Robust Mean-CVaR Portfolio Optimization. International Scholarly Research Notices, 2013(1), Article ID 570950, 9 pages.

Soyster, A. L. (1973). Convex programming with set-inclusive constraints and applications to inexact linear programming. Oper. Res. 21(5) 1154–1157

Zymler, S., Rustem, B., & Kuhn, D. (2011). Robust portfolio optimization with derivative insurance guarantees.Oper. Res, 210(2), 410– 424.