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Constructing Risk Measures from Uncertainty Sets

Author

Listed:
  • Karthik Natarajan

    (Department of Mathematics and NUS Risk Management Institute, National University of Singapore, Singapore)

  • Dessislava Pachamanova

    (Division of Mathematics and Sciences, Babson College, Babson Park, Massachusetts 02457)

  • Melvyn Sim

    (NUS Business School and NUS Risk Management Institute, National University of Singapore, Singapore)

Abstract

We illustrate the correspondence between uncertainty sets in robust optimization and some popular risk measures in finance and show how robust optimization can be used to generalize the concepts of these risk measures. We also show that by using properly defined uncertainty sets in robust optimization models, one can construct coherent risk measures and address the issue of the computational tractability of the resulting formulations. Our results have implications for efficient portfolio optimization under different measures of risk.

Suggested Citation

  • Karthik Natarajan & Dessislava Pachamanova & Melvyn Sim, 2009. "Constructing Risk Measures from Uncertainty Sets," Operations Research, INFORMS, vol. 57(5), pages 1129-1141, October.
    • Handle: RePEc:inm:oropre:v:57:y:2009:i:5:p:1129-1141
    DOI: 10.1287/opre.1080.0683
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    References listed on IDEAS

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