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Quantile-based optimal portfolio selection

Taras Bodnar, Mathias Lindholm, Erik Thorsén (erik.thorsen@math.su.se) and Joanna Tyrcha
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Taras Bodnar: Stockholm University
Mathias Lindholm: Stockholm University
Erik Thorsén: Stockholm University
Joanna Tyrcha: Stockholm University

Computational Management Science, 2021, vol. 18, issue 3, No 3, 299-324

Abstract: Abstract In this paper the concept of quantile-based optimal portfolio selection is introduced and a specific portfolio connected to it, the conditional value-of-return (CVoR) portfolio, is proposed. The CVoR is defined as the mean excess return or the conditional value-at-risk (CVaR) of the return distribution. The portfolio selection consists solely of quantile-based risk and return measures. Financial institutions that work in the context of Basel 4 use CVaR as a risk measure. In this regulatory framework sufficient and necessary conditions for optimality of the CVoR portfolio are provided under a general distributional assumption. Moreover, it is shown that the CVoR portfolio is mean-variance efficient when the returns are assumed to follow an elliptically contoured distribution. Under this assumption the closed-form expression for the weights and characteristics of the CVoR portfolio are obtained. Finally, the introduced methods are illustrated in an empirical study based on monthly data of returns on stocks included in the S&P index. It is shown that the new portfolio selection strategy outperforms several alternatives in terms of the final investor wealth.

Keywords: Quantile-based return measure; VaR; CVaR; CVoR; Optimal portfolios; Elliptically contoured distributions (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10287-021-00395-8

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