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Optimal Portfolio Selection for Tehran Stock Exchange Using Conditional, Partitioned and Worst-case Value at Risk Measures

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  • Adabi Firouzjaee , Bagher

    (University of Tehran)

  • Mehrara , Mohsen

    (University of Tehran)

  • Mohammadi , Shapour

    (University of Tehran)

Abstract

This paper presents an optimal portfolio selection approach based on value at risk (VaR), conditional value at risk (CVaR), worst-case value at risk (WVaR) and partitioned value at risk (PVaR) measures as well as calculating these risk measures. Mathematical solution methods for solving these optimization problems are inadequate and very complex for a portfolio with high number of assets. For these reasons, a combination of particle swarm optimization (PSO) and genetic algorithm (GA) is used to determine optimized weights of assets. Stocks' Optimized weight results show that proposed algorithm gives more accurate outcomes in comparison with GA algorithm. According to back-testing analysis, PVaR and WVaR overestimate risk value while VaR and CVaR give a rather accurate estimation. A set of companies in Tehran Stock Exchange are considered as a case study for empirical analysis.

Suggested Citation

  • Adabi Firouzjaee , Bagher & Mehrara , Mohsen & Mohammadi , Shapour, 2014. "Optimal Portfolio Selection for Tehran Stock Exchange Using Conditional, Partitioned and Worst-case Value at Risk Measures," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(1), pages 1-30, October.
    • Handle: RePEc:mbr:jmonec:v:9:y:2014:i:1:p:1-30
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    More about this item

    Keywords

    portfolio optimization; value at risk; CVaR; WVaR; PVaR; HGAPSO;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G19 - Financial Economics - - General Financial Markets - - - Other

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