699 research outputs found
The impact of association measures within the portfolio dimensionality reduction problem
The dependency structure of random sources plays a crucial role in portfolio theory and in several pricing and risk management problems. In this paper, we discuss the possible usage of alternative association measures in portfolio problems. Among association measures, we highlight those that are consistent with the choices of risk-averse investors and we characterise semidefinite positive association measures. Additionally, we propose new portfolio selection problems that optimise the association between the portfolio and market benchmarks and follow a dimensionality reduction problem. Finally, by carrying out an empirical analysis, we show the impact of selected association measures within the portfolio problem. This analysis proves that the proper usage of both a risk measure and an association measure can increase the portfolio performance substantially
International Portfolio Management under Uncertainty
Although the consideration of foreign investments may have a positive impact
on the overall market risk of the portfolio through diversi cation, it also adds
a new source of uncertainty due to changes in the value of the currency. We
investigate portfolio optimization models that account separately for the local
asset returns and the currency returns, providing the investor with a full
investment strategy. We tackle the uncertainty inherent to the estimation of
the parameters with the aid of robust optimization techniques. We show how,
by using appropriate assumptions regarding the formulation of the uncertainty
sets, the original non-linear and non-convex models may be reformulated as
second order cone or as semide nite programs. Additionally to the guarantees
provided by robust optimization, we consider the use of hedging instruments
such as forward contracts and options. The proposed hedging strategies are
implemented from a portfolio perspective, and therefore do not depend on the
individual value or behavior of any particular asset or currency. Hedging decisions
are taken at the same time as investment decisions in a holistic approach
to portfolio management. While dynamic decision making has traditionally
been represented as scenario trees, these may become severely intractable and
di cult to compute with an increasing number of time periods. We present an
alternative approach to multiperiod international portfolio optimization based
on an a ne dependence between the decision variables and the past returns.
We add to our formulation the minimization of the worst case value-at-risk and
show the close relationship with robust optimization. The proposed theoretical
framework is supported by various numerical experiments with simulated and
historical market data demonstrating its potential bene ts
Configuration model for correlation matrices preserving the node strength
Correlation matrices are a major type of multivariate data. To examine
properties of a given correlation matrix, a common practice is to compare the
same quantity between the original correlation matrix and reference correlation
matrices, such as those derived from random matrix theory, that partially
preserve properties of the original matrix. We propose a model to generate such
reference correlation and covariance matrices for the given matrix. Correlation
matrices are often analysed as networks, which are heterogeneous across nodes
in terms of the total connectivity to other nodes for each node. Given this
background, the present algorithm generates random networks that preserve the
expectation of total connectivity of each node to other nodes, akin to
configuration models for conventional networks. Our algorithm is derived from
the maximum entropy principle. We will apply the proposed algorithm to
measurement of clustering coefficients and community detection, both of which
require a null model to assess the statistical significance of the obtained
results.Comment: 8 figures, 4 table
The Wishart short rate model
We consider a short rate model, driven by a stochastic process on the cone of
positive semidefinite matrices. We derive sufficient conditions ensuring that
the model replicates normal, inverse or humped yield curves
Efficient Solution of Portfolio Optimization Problems via Dimension Reduction and Sparsification
The Markowitz mean-variance portfolio optimization model aims to balance
expected return and risk when investing. However, there is a significant
limitation when solving large portfolio optimization problems efficiently: the
large and dense covariance matrix. Since portfolio performance can be
potentially improved by considering a wider range of investments, it is
imperative to be able to solve large portfolio optimization problems
efficiently, typically in microseconds. We propose dimension reduction and
increased sparsity as remedies for the covariance matrix. The size reduction is
based on predictions from machine learning techniques and the solution to a
linear programming problem. We find that using the efficient frontier from the
linear formulation is much better at predicting the assets on the Markowitz
efficient frontier, compared to the predictions from neural networks. Reducing
the covariance matrix based on these predictions decreases both runtime and
total iterations. We also present a technique to sparsify the covariance matrix
such that it preserves positive semi-definiteness, which improves runtime per
iteration. The methods we discuss all achieved similar portfolio expected risk
and return as we would obtain from a full dense covariance matrix but with
improved optimizer performance.Comment: 14 pages, 3 figure
Distributionally robust optimization with applications to risk management
Many decision problems can be formulated as mathematical optimization models. While deterministic
optimization problems include only known parameters, real-life decision problems
almost invariably involve parameters that are subject to uncertainty. Failure to take this
uncertainty under consideration may yield decisions which can lead to unexpected or even
catastrophic results if certain scenarios are realized.
While stochastic programming is a sound approach to decision making under uncertainty, it
assumes that the decision maker has complete knowledge about the probability distribution
that governs the uncertain parameters. This assumption is usually unjustified as, for most
realistic problems, the probability distribution must be estimated from historical data and
is therefore itself uncertain. Failure to take this distributional modeling risk into account
can result in unduly optimistic risk assessment and suboptimal decisions. Furthermore, for
most distributions, stochastic programs involving chance constraints cannot be solved using
polynomial-time algorithms.
In contrast to stochastic programming, distributionally robust optimization explicitly accounts
for distributional uncertainty. In this framework, it is assumed that the decision maker has
access to only partial distributional information, such as the first- and second-order moments
as well as the support. Subsequently, the problem is solved under the worst-case distribution
that complies with this partial information. This worst-case approach effectively immunizes
the problem against distributional modeling risk.
The objective of this thesis is to investigate how robust optimization techniques can be used
for quantitative risk management. In particular, we study how the risk of large-scale derivative
portfolios can be computed as well as minimized, while making minimal assumptions about
the probability distribution of the underlying asset returns. Our interest in derivative portfolios
stems from the fact that careless investment in derivatives can yield large losses or even
bankruptcy. We show that by employing robust optimization techniques we are able to capture
the substantial risks involved in derivative investments. Furthermore, we investigate how
distributionally robust chance constrained programs can be reformulated or approximated as
tractable optimization problems. Throughout the thesis, we aim to derive tractable models
that are scalable to industrial-size problems
PORTFOLIO OPTIMIZATION IN ELECTRICITY TRADING WITH LIMITED LIQUIDITY
In principle, portfolio optimization in electricity markets can make use of the standard mean-variance model going back to Markowitz. Yet a key restriction in most electricity markets is the limited liquidity. Therefore the standard model has to be adapted to cope with limited liquidity. An application of this model shows that the optimal hedging strategy for generation portfolios is strongly dependent on the size of the portfolio considered as well as on the variance-covariancematrix used and the liquidity function assumed.optimization; electricity, liquidity; electricity trading; mean-variance-model
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