Robust Bayesian portfolio optimization

Carlos Andres Zapata Quimbayo, Diego Felipe Carmona Espejo and Jhonatan Gamboa Hidalgo

International Review of Financial Analysis, 2025, vol. 103, issue C

Abstract: We propose a robust Bayesian model using the normal-inverse-Wishart and Gamma distributions for an investment portfolio consisting of the stocks of the United States Dow Jones Industrial Index. To this end, the Bayesian approach and the robust portfolio model are integrated to determine the uncertainty of the estimated parameters in expected returns and covariances using ellipsoidal or quadratic type uncertainty sets. The results show that the proposed method exhibits better performance and diversification than the traditional mean-variance model as well as the robust portfolios.

Keywords: Optimal portfolio; Robust optimization; Uncertainty sets (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:103:y:2025:i:c:s1057521925003023

DOI: 10.1016/j.irfa.2025.104215

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