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Robustness of optimal portfolios under risk and stochastic dominance constraints

Jitka Dupačová and Miloš Kopa

European Journal of Operational Research, 2014, vol. 234, issue 2, 434-441

Abstract: Solutions of portfolio optimization problems are often influenced by a model misspecification or by errors due to approximation, estimation and incomplete information. The obtained results, recommendations for the risk and portfolio manager, should be then carefully analyzed. We shall deal with output analysis and stress testing with respect to uncertainty or perturbations of input data for static risk constrained portfolio optimization problems by means of the contamination technique. Dependence of the set of feasible solutions on the probability distribution rules out the straightforward construction of convexity-based global contamination bounds. Results obtained in our paper [Dupačová, J., & Kopa, M. (2012). Robustness in stochastic programs with risk constraints. Annals of Operations Research, 200, 55–74.] were derived for the risk and second order stochastic dominance constraints under suitable smoothness and/or convexity assumptions that are fulfilled, e.g. for the Markowitz mean–variance model. In this paper we relax these assumptions having in mind the first order stochastic dominance and probabilistic risk constraints. Local bounds for problems of a special structure are obtained. Under suitable conditions on the structure of the problem and for discrete distributions we shall exploit the contamination technique to derive a new robust first order stochastic dominance portfolio efficiency test.

Keywords: Robustness and sensitivity analysis; Markowitz mean–variance model; Probabilistic risk constraints; Contamination technique; First order stochastic dominance constraints; Portfolio efficiency tests (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:234:y:2014:i:2:p:434-441

DOI: 10.1016/j.ejor.2013.06.018

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