Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Stability analysis of portfolio management with conditional value-at-risk
AU - Kaut, Michal
AU - Vladimirou, Hercules
AU - Wallace, Stein W
AU - Zenios, Stavros
PY - 2007
Y1 - 2007
N2 - We examine the stability of a portfolio management model based on the conditional value-at-risk (CVaR) measure; the model controls risk exposure of international investment portfolios. We use a moment-matching method to generate discrete distributions (scenario sets) of asset returns and exchange rates so that their statistical properties match corresponding values estimated from historical data. First, we establish that the scenario generation procedure does not bias the results of the optimization program, and we determine the required number of scenarios to attain stable solutions. We then investigate the sensitivity of the CVaR model to mis-specifications in the statistics of stochastic parameters: mean, standard deviation, skewness, kurtosis, as well as correlations. The results are most sensitive to estimation errors in the means of the stochastic parameters (asset returns and currency exchange rates). Mis-specifications in the standard deviation, skewness and correlations of the random parameters also have considerable impact on the solutions. The effect of mis-specifications in the values of kurtosis, although less than that of the other statistics, is still not negligible.
AB - We examine the stability of a portfolio management model based on the conditional value-at-risk (CVaR) measure; the model controls risk exposure of international investment portfolios. We use a moment-matching method to generate discrete distributions (scenario sets) of asset returns and exchange rates so that their statistical properties match corresponding values estimated from historical data. First, we establish that the scenario generation procedure does not bias the results of the optimization program, and we determine the required number of scenarios to attain stable solutions. We then investigate the sensitivity of the CVaR model to mis-specifications in the statistics of stochastic parameters: mean, standard deviation, skewness, kurtosis, as well as correlations. The results are most sensitive to estimation errors in the means of the stochastic parameters (asset returns and currency exchange rates). Mis-specifications in the standard deviation, skewness and correlations of the random parameters also have considerable impact on the solutions. The effect of mis-specifications in the values of kurtosis, although less than that of the other statistics, is still not negligible.
KW - Portfolio management
KW - Stability analysis
KW - Impact of higher-order moments
KW - Estimation errors
KW - Conditional value-at-risk
U2 - 10.1080/14697680701483222
DO - 10.1080/14697680701483222
M3 - Journal article
VL - 7
SP - 397
EP - 409
JO - Quantitative Finance
JF - Quantitative Finance
SN - 1469-7688
IS - 4
ER -