Robust tracking error portfolio selection with worst-case downside risk measures

Aifan Ling, Jie Sun and Xiaoguang Yang

Journal of Economic Dynamics and Control, 2014, vol. 39, issue C, 178-207

Abstract: This paper proposes downside risk measure models in portfolio selection that captures uncertainties both in distribution and in parameters. The worst-case distribution with given information on the mean value and the covariance matrix is used, together with ellipsoidal and polytopic uncertainty sets, to build-up this type of downside risk model. As an application of the models, the tracking error portfolio selection problem is considered. By lifting the vector variables to positive semidefinite matrix variables, we obtain semidefinite programming formulations of the robust tracking portfolio models. Numerical results are presented in tracking SSE50 of the Shanghai Stock Exchange. Compared with the tracking error variance portfolio model and the equally weighted strategy, the proposed models are more stable, have better accumulated wealth and have much better Sharpe ratio in the investment period for the majority of observed instances.

Keywords: Downside risk measure; Robust tracking error portfolio; Semidefinite programming; Sharpe ratio (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188913002352
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:39:y:2014:i:c:p:178-207

DOI: 10.1016/j.jedc.2013.11.011

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().