Nonlinear portfolio selection using approximate parametric Value-at-Risk

Xueting Cui, Shushang Zhu, Xiaoling Sun and Duan Li

Journal of Banking & Finance, 2013, vol. 37, issue 6, 2124-2139

Abstract: As the skewed return distribution is a prominent feature in nonlinear portfolio selection problems which involve derivative assets with nonlinear payoff structures, Value-at-Risk (VaR) is particularly suitable to serve as a risk measure in nonlinear portfolio selection. Unfortunately, the nonlinear portfolio selection formulation using VaR risk measure is in general a computationally intractable optimization problem. We investigate in this paper nonlinear portfolio selection models using approximate parametric Value-at-Risk. More specifically, we use first-order and second-order approximations of VaR for constructing portfolio selection models, and show that the portfolio selection models based on Delta-only, Delta–Gamma-normal and worst-case Delta–Gamma VaR approximations can be reformulated as second-order cone programs, which are polynomially solvable using interior-point methods. Our simulation and empirical results suggest that the model using Delta–Gamma-normal VaR approximation performs the best in terms of a balance between approximation accuracy and computational efficiency.

Keywords: Portfolio selection; Value-at-Risk; European option; Delta–Gamma approximation; Second-order cone programming (search for similar items in EconPapers)
JEL-codes: C61 G11 G32 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426613000617
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:jbfina:v:37:y:2013:i:6:p:2124-2139

DOI: 10.1016/j.jbankfin.2013.01.036

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().