Robust minimum variance portfolio optimization modelling under scenario uncertainty

Panos Xidonas, Christis Hassapis, John Soulis and Aristeidis Samitas

Economic Modelling, 2017, vol. 64, issue C, 60-71

Abstract: Our purpose in this article is to develop a robust optimization model which minimizes portfolio variance for a finite set of covariance matrices scenarios. The proposed approach aims at the proper selection of portfolios, in a way that for every covariance matrix estimate included in the analysis, the calculated portfolio variance remains as close to the corresponding individual minimum value, as possible. To accomplish this, we formulate a mixed-integer non-linear program with quadratic constraints. With respect to practical underlying concerns, investment policy constraints regarding the portfolio structure are also taken into consideration. The validity of the proposed approach is verified through extensive out-of-sample empirical testing in the EuroStoxx 50, the S&P 100, the S&P 500, as well as a well-diversified investment universe of ETFs. We report consistent generation of stable out-of-sample returns, which are in most cases superior to those of the worst-case scenario. Moreover, we provide strong evidence that the proposed robust model assists in selective asset picking and systematic avoidance of excessive losses.

Keywords: Portfolio optimization; Robustness; Scenario uncertainty (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999316305880
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:ecmode:v:64:y:2017:i:c:p:60-71

DOI: 10.1016/j.econmod.2017.03.020

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().