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Stability analysis of portfolio management with conditional value-at-risk

Kaut, Michal and Vladimirou, Hercules and Wallace, Stein W and Zenios, Stavros (2007) Stability analysis of portfolio management with conditional value-at-risk. Quantitative Finance, 7 (4). pp. 397-409. ISSN 1469-7688

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Abstract

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.

Item Type: Article
Journal or Publication Title: Quantitative Finance
Uncontrolled Keywords: Portfolio management ; Stability analysis ; Impact of higher-order moments ; Estimation errors ; Conditional value-at-risk
Subjects: UNSPECIFIED
Departments: Lancaster University Management School > Management Science
ID Code: 45405
Deposited By: ep_importer_pure
Deposited On: 11 Jul 2011 19:31
Refereed?: Yes
Published?: Published
Last Modified: 26 Jul 2012 19:16
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/45405

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