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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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.

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Journal Article
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Quantitative Finance
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11 Jul 2011 18:31
Last Modified:
21 Nov 2022 21:24