IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v12y2011i1d10.1057_jam.2010.15.html
   My bibliography  Save this article

Robust portfolio allocation under discrete asset choice constraints

Author

Listed:
  • Nalan Gülpınar

    (Warwick Business School, The University of Warwick)

  • Kabir Katata
  • Dessislava A Pachamanova

Abstract

The mean-variance portfolio allocation model is very sensitive to estimation errors in the model parameters. Robust optimization is a technique used to incorporate the uncertainty introduced by estimation errors directly into portfolio allocation. Practitioners are often faced with complex constraints on the portfolio structure such as limits on the number of securities in the portfolio, which are modelled with discrete variables, and introduce discontinuities in the efficient frontier. This article investigates the size of discontinuities in the efficient frontiers obtained by the classical and robust mean-variance models under such discrete asset choice constraints, as well as the impact of portfolio size on the discontinuity being considered. In addition, we analyse the effects of applying discrete asset choice restrictions to the portfolio selection problem, as well as using estimated and true parameters in the computation of the classical and robust mean-variance investment strategies under discrete asset choice constraints. Computational experiments reveal reduction of the size of discontinuity when using robust optimization mean-variance models.

Suggested Citation

  • Nalan Gülpınar & Kabir Katata & Dessislava A Pachamanova, 2011. "Robust portfolio allocation under discrete asset choice constraints," Journal of Asset Management, Palgrave Macmillan, vol. 12(1), pages 67-83, April.
    • Handle: RePEc:pal:assmgt:v:12:y:2011:i:1:d:10.1057_jam.2010.15
    DOI: 10.1057/jam.2010.15
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/jam.2010.15
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/jam.2010.15?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sebastián Ceria & Robert A Stubbs, 2006. "Incorporating estimation errors into portfolio selection: Robust portfolio construction," Journal of Asset Management, Palgrave Macmillan, vol. 7(2), pages 109-127, July.
    2. D. Goldfarb & G. Iyengar, 2003. "Robust Portfolio Selection Problems," Mathematics of Operations Research, INFORMS, vol. 28(1), pages 1-38, February.
    3. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
    4. Nalan Gülpinar & Berç Rustem & Stanislav Žaković, 2007. "Stochastic Optimization and Worst-case Decisions," Lecture Notes in Economics and Mathematical Systems, in: Don Grundel & Robert Murphey & Panos Pardalos & Oleg Prokopyev (ed.), Cooperative Systems, pages 317-338, Springer.
    5. N. J. Jobst & M. D. Horniman & C. A. Lucas & G. Mitra, 2001. "Computational aspects of alternative portfolio selection models in the presence of discrete asset choice constraints," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 489-501.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jang Ho Kim & Woo Chang Kim & Frank J. Fabozzi, 2014. "Recent Developments in Robust Portfolios with a Worst-Case Approach," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 103-121, April.
    2. Panos Xidonas & Ralph Steuer & Christis Hassapis, 2020. "Robust portfolio optimization: a categorized bibliographic review," Annals of Operations Research, Springer, vol. 292(1), pages 533-552, September.
    3. Jang Ho Kim & Woo Chang Kim & Frank J. Fabozzi, 2018. "Recent advancements in robust optimization for investment management," Annals of Operations Research, Springer, vol. 266(1), pages 183-198, July.
    4. Alireza Ghahtarani & Ahmed Saif & Alireza Ghasemi, 2022. "Robust portfolio selection problems: a comprehensive review," Operational Research, Springer, vol. 22(4), pages 3203-3264, September.
    5. Gülpınar, Nalân & Çanakoḡlu, Ethem, 2017. "Robust portfolio selection problem under temperature uncertainty," European Journal of Operational Research, Elsevier, vol. 256(2), pages 500-523.
    6. Alireza Ghahtarani & Ahmed Saif & Alireza Ghasemi, 2021. "Robust Portfolio Selection Problems: A Comprehensive Review," Papers 2103.13806, arXiv.org, revised Jan 2022.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erindi Allaj, 2020. "The Black–Litterman model and views from a reverse optimization procedure: an out-of-sample performance evaluation," Computational Management Science, Springer, vol. 17(3), pages 465-492, October.
    2. P. Bonami & M. A. Lejeune, 2009. "An Exact Solution Approach for Portfolio Optimization Problems Under Stochastic and Integer Constraints," Operations Research, INFORMS, vol. 57(3), pages 650-670, June.
    3. Miguel A. Lejeune & Gülay Samatlı-Paç, 2013. "Construction of Risk-Averse Enhanced Index Funds," INFORMS Journal on Computing, INFORMS, vol. 25(4), pages 701-719, November.
    4. Vaughn Gambeta & Roy Kwon, 2020. "Risk Return Trade-Off in Relaxed Risk Parity Portfolio Optimization," JRFM, MDPI, vol. 13(10), pages 1-28, October.
    5. Mainik, Georg & Mitov, Georgi & Rüschendorf, Ludger, 2015. "Portfolio optimization for heavy-tailed assets: Extreme Risk Index vs. Markowitz," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 115-134.
    6. Fonseca, Raquel J. & Rustem, Berç, 2012. "International portfolio management with affine policies," European Journal of Operational Research, Elsevier, vol. 223(1), pages 177-187.
    7. Georg Mainik & Georgi Mitov & Ludger Ruschendorf, 2015. "Portfolio optimization for heavy-tailed assets: Extreme Risk Index vs. Markowitz," Papers 1505.04045, arXiv.org.
    8. Gruszka, Jarosław & Szwabiński, Janusz, 2021. "Advanced strategies of portfolio management in the Heston market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    9. Kolm, Petter N. & Tütüncü, Reha & Fabozzi, Frank J., 2014. "60 Years of portfolio optimization: Practical challenges and current trends," European Journal of Operational Research, Elsevier, vol. 234(2), pages 356-371.
    10. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," The Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    11. Lotfi, Somayyeh & Zeniosn, Stravros A., 2016. "Equivalence of Robust VaR and CVaR Optimization," Working Papers 16-03, University of Pennsylvania, Wharton School, Weiss Center.
    12. Giorgio Costa & Roy Kwon, 2020. "A robust framework for risk parity portfolios," Journal of Asset Management, Palgrave Macmillan, vol. 21(5), pages 447-466, September.
    13. Andrew Butler & Roy H. Kwon, 2021. "Data-driven integration of norm-penalized mean-variance portfolios," Papers 2112.07016, arXiv.org, revised Nov 2022.
    14. Zhilin Kang & Zhongfei Li, 2018. "An exact solution to a robust portfolio choice problem with multiple risk measures under ambiguous distribution," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 87(2), pages 169-195, April.
    15. Gabriel Frahm & Tobias Wickern & Christof Wiechers, 2012. "Multiple tests for the performance of different investment strategies," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 96(3), pages 343-383, July.
    16. Dimitris Andriosopoulos & Michalis Doumpos & Panos M. Pardalos & Constantin Zopounidis, 2019. "Computational approaches and data analytics in financial services: A literature review," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 70(10), pages 1581-1599, October.
    17. Gianfranco Guastaroba & Gautam Mitra & M Grazia Speranza, 2011. "Investigating the effectiveness of robust portfolio optimization techniques," Journal of Asset Management, Palgrave Macmillan, vol. 12(4), pages 260-280, September.
    18. Frank Fabozzi & Dashan Huang & Guofu Zhou, 2010. "Robust portfolios: contributions from operations research and finance," Annals of Operations Research, Springer, vol. 176(1), pages 191-220, April.
    19. Björn Fastrich & Peter Winker, 2012. "Robust portfolio optimization with a hybrid heuristic algorithm," Computational Management Science, Springer, vol. 9(1), pages 63-88, February.
    20. Jang Ho Kim & Woo Chang Kim & Do-Gyun Kwon & Frank J. Fabozzi, 2018. "Robust equity portfolio performance," Annals of Operations Research, Springer, vol. 266(1), pages 293-312, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:12:y:2011:i:1:d:10.1057_jam.2010.15. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.