IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v237y2016i1d10.1007_s10479-014-1625-3.html
   My bibliography  Save this article

Portfolio optimization with a copula-based extension of conditional value-at-risk

Author

Listed:
  • Adam Krzemienowski

    (Warsaw University of Technology)

  • Sylwia Szymczyk

    (Warsaw University of Technology)

Abstract

The paper presents a copula-based extension of Conditional Value-at-Risk and its application to portfolio optimization. Copula-based conditional value-at-risk (CCVaR) is a scalar risk measure for multivariate risks modeled by multivariate random variables. It is assumed that the univariate risk components are perfect substitutes, i.e., they are expressed in the same units. CCVaR is a quantile risk measure that allows one to emphasize the consequences of more pessimistic scenarios. By changing the level of a quantile, the measure permits to parameterize prudent attitudes toward risk ranging from the extreme risk aversion to the risk neutrality. In terms of definition, CCVaR is slightly different from popular and well-researched CVaR. Nevertheless, this small difference allows one to efficiently solve CCVaR portfolio optimization problems based on the full information carried by a multivariate random variable by employing column generation algorithm.

Suggested Citation

  • Adam Krzemienowski & Sylwia Szymczyk, 2016. "Portfolio optimization with a copula-based extension of conditional value-at-risk," Annals of Operations Research, Springer, vol. 237(1), pages 219-236, February.
    • Handle: RePEc:spr:annopr:v:237:y:2016:i:1:d:10.1007_s10479-014-1625-3
    DOI: 10.1007/s10479-014-1625-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-014-1625-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-014-1625-3?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. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    2. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    3. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    4. Włodzimierz Ogryczak & Tomasz Śliwiński, 2011. "On solving the dual for portfolio selection by optimizing Conditional Value at Risk," Computational Optimization and Applications, Springer, vol. 50(3), pages 591-595, December.
    5. Bawa, Vijay S., 1978. "Safety-First, Stochastic Dominance, and Optimal Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(2), pages 255-271, June.
    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. Andres Mauricio Molina Barreto & Naoyuki Ishimura, 2023. "Remarks on a copula‐based conditional value at risk for the portfolio problem," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 30(3), pages 150-170, July.
    2. Parul BHATIA & Priya GUPTA, 2020. "Portfolio optimization with VaR approach: A comparative analysis for Japan, London, New York and India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(625), W), pages 245-262, Winter.
    3. K. Liagkouras & K. Metaxiotis, 2018. "A new efficiently encoded multiobjective algorithm for the solution of the cardinality constrained portfolio optimization problem," Annals of Operations Research, Springer, vol. 267(1), pages 281-319, August.
    4. Yinping You & Xiaohu Li, 2017. "Most unfavorable deductibles and coverage limits for multiple random risks with Archimedean copulas," Annals of Operations Research, Springer, vol. 259(1), pages 485-501, December.
    5. Degiannakis, Stavros & Potamia, Artemis, 2017. "Multiple-days-ahead value-at-risk and expected shortfall forecasting for stock indices, commodities and exchange rates: Inter-day versus intra-day data," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 176-190.
    6. E. Allevi & L. Boffino & M. E. Giuli & G. Oggioni, 2019. "Analysis of long-term natural gas contracts with vine copulas in optimization portfolio problems," Annals of Operations Research, Springer, vol. 274(1), pages 1-37, March.
    7. Tamara Teplova & Mikova Evgeniia & Qaiser Munir & Nataliya Pivnitskaya, 2023. "Black-Litterman model with copula-based views in mean-CVaR portfolio optimization framework with weight constraints," Economic Change and Restructuring, Springer, vol. 56(1), pages 515-535, February.
    8. Kenichiro Shiraya & Tomohisa Yamakami, 2023. "Constructing Copulas Using Corrected Hermite Polynomial Expansion for Estimating Cross Foreign Exchange Volatility," Papers 2301.10044, arXiv.org.
    9. Shiraya, Kenichiro & Yamakami, Tomohisa, 2024. "Constructing copulas using corrected Hermite polynomial expansion for estimating cross foreign exchange volatility," European Journal of Operational Research, Elsevier, vol. 314(3), pages 1195-1214.
    10. Wei Chen & Yun Wang & Mukesh Kumar Mehlawat, 2018. "A hybrid FA–SA algorithm for fuzzy portfolio selection with transaction costs," Annals of Operations Research, Springer, vol. 269(1), pages 129-147, October.
    11. Vahidin Jeleskovic & Claudio Latini & Zahid I. Younas & Mamdouh A. S. Al-Faryan, 2023. "Optimization of portfolios with cryptocurrencies: Markowitz and GARCH-Copula model approach," Papers 2401.00507, arXiv.org.
    12. K. Liagkouras & K. Metaxiotis, 2019. "Improving the performance of evolutionary algorithms: a new approach utilizing information from the evolutionary process and its application to the fuzzy portfolio optimization problem," Annals of Operations Research, Springer, vol. 272(1), pages 119-137, January.
    13. Wei Chen & Yuxi Gai & Pankaj Gupta, 2018. "Efficiency evaluation of fuzzy portfolio in different risk measures via DEA," Annals of Operations Research, Springer, vol. 269(1), pages 103-127, October.
    14. Cerqueti, Roy & Giacalone, Massimiliano & Panarello, Demetrio, 2019. "A Generalized Error Distribution Copula-based method for portfolios risk assessment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 524(C), pages 687-695.

    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. Adam Krzemienowski & Sylwia Szymczyk, 2016. "Portfolio optimization with a copula-based extension of conditional value-at-risk," Annals of Operations Research, Springer, vol. 237(1), pages 219-236, February.
    2. Eeckhoudt, Louis & Fiori, Anna Maria & Rosazza Gianin, Emanuela, 2016. "Loss-averse preferences and portfolio choices: An extension," European Journal of Operational Research, Elsevier, vol. 249(1), pages 224-230.
    3. Salo, Ahti & Doumpos, Michalis & Liesiö, Juuso & Zopounidis, Constantin, 2024. "Fifty years of portfolio optimization," European Journal of Operational Research, Elsevier, vol. 318(1), pages 1-18.
    4. Robert Jarrow & Feng Zhao, 2006. "Downside Loss Aversion and Portfolio Management," Management Science, INFORMS, vol. 52(4), pages 558-566, April.
    5. Basu, Anup K. & Drew, Michael E., 2010. "The appropriateness of default investment options in defined contribution plans: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 290-305, June.
    6. Ken Kobayashi & Yuichi Takano & Kazuhide Nakata, 2021. "Bilevel cutting-plane algorithm for cardinality-constrained mean-CVaR portfolio optimization," Journal of Global Optimization, Springer, vol. 81(2), pages 493-528, October.
    7. Karma, Otto & Sander, Priit, 2006. "The impact of financial leverage on risk of equity measured by loss-oriented risk measures: An option pricing approach," European Journal of Operational Research, Elsevier, vol. 175(3), pages 1340-1356, December.
    8. Alexander Vinel & Pavlo A. Krokhmal, 2017. "Certainty equivalent measures of risk," Annals of Operations Research, Springer, vol. 249(1), pages 75-95, February.
    9. Iosif Pinelis, 2013. "An optimal three-way stable and monotonic spectrum of bounds on quantiles: a spectrum of coherent measures of financial risk and economic inequality," Papers 1310.6025, arXiv.org.
    10. Capitani, Daniel Henrique Dario & Mattos, Fabio, 2012. "Risk measurement in commodities markets: How much price risk do agricultural producers really face?," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124761, Agricultural and Applied Economics Association.
    11. Niv Nayman, 2018. "Shortfall Risk Minimization Under Fixed Transaction Costs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(05), pages 1-29, August.
    12. Lwin, Khin T. & Qu, Rong & MacCarthy, Bart L., 2017. "Mean-VaR portfolio optimization: A nonparametric approach," European Journal of Operational Research, Elsevier, vol. 260(2), pages 751-766.
    13. Fredy Pokou & Jules Sadefo Kamdem & François Benhmad, 2024. "Empirical Performance of an ESG Assets Portfolio from US Market," Computational Economics, Springer;Society for Computational Economics, vol. 64(3), pages 1569-1638, September.
    14. Valeri Zakamouline & Steen Koekebakker, 2009. "A Generalisation of the Mean†Variance Analysis," European Financial Management, European Financial Management Association, vol. 15(5), pages 934-970, November.
    15. Ruili Sun & Tiefeng Ma & Shuangzhe Liu & Milind Sathye, 2019. "Improved Covariance Matrix Estimation for Portfolio Risk Measurement: A Review," JRFM, MDPI, vol. 12(1), pages 1-34, March.
    16. Ahmadi-Javid, Amir & Fallah-Tafti, Malihe, 2019. "Portfolio optimization with entropic value-at-risk," European Journal of Operational Research, Elsevier, vol. 279(1), pages 225-241.
    17. Kaplanski, Guy & Kroll, Yoram, 2002. "VaR Risk Measures versus Traditional Risk Measures: an Analysis and Survey," MPRA Paper 80070, University Library of Munich, Germany.
    18. Nakano Yumiharu, 2006. "Mean-risk optimization for index tracking," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 1-19, July.
    19. Jun-ya Gotoh & Akiko Takeda & Rei Yamamoto, 2014. "Interaction between financial risk measures and machine learning methods," Computational Management Science, Springer, vol. 11(4), pages 365-402, October.
    20. L. Jeff Hong & Zhaolin Hu & Liwei Zhang, 2014. "Conditional Value-at-Risk Approximation to Value-at-Risk Constrained Programs: A Remedy via Monte Carlo," INFORMS Journal on Computing, INFORMS, vol. 26(2), pages 385-400, May.

    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:spr:annopr:v:237:y:2016:i:1:d:10.1007_s10479-014-1625-3. 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.springer.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.