Explicit Value at Risk Goal Function in Bi-Level Portfolio Problem for Financial Sustainability

Todor Stoilov, Krasimira Stoilova and Miroslav Vladimirov
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Todor Stoilov: Institute of Information and Communication Technologies, Bulgarian Academy of Sciences, 1113 Sofia, Bulgaria
Krasimira Stoilova: Institute of Information and Communication Technologies, Bulgarian Academy of Sciences, 1113 Sofia, Bulgaria
Miroslav Vladimirov: Management and Administration, University of Economics-Varna, 9002 Varna, Bulgaria

Sustainability, 2021, vol. 13, issue 4, 1-14

Abstract: The mean-variance (MV) portfolio optimization targets higher return for investment period despite the unknown stochastic behavior of the future asset returns. That is why a risk is explicitly considering, quantified by algebraic characteristics of volatilities and co-variances. A new probabilistic definition of portfolio risk is the Value at Risk (VaR). The paper makes explicit inclusion and minimization of VaR as a quantitative measure of financial sustainability of a portfolio problem. Thus, the portfolio weights as problem solutions will respect not only the MV requirements for risk and return, but also the additional minimization of risk defined by VaR level. The portfolio problem is defined in a new, bi-level form. The upper level minimizes and evaluates the VaR value. The lower level evaluates the optimal assets weights by minimizing portfolio risk and maximizing the return in MV form. The bi-level model allows to have extended set of portfolio solutions with the portfolio weights and the value of VaR. Graphical interpretation of this bi-level definition of the portfolio problem explains the differences with the MV portfolio definition. Thus, the bi-level portfolio problem evaluates the optimal weights, which makes maximization of portfolio return and minimization of the risk in its algebraic and probabilistic form of definition.

Keywords: portfolio optimization; resource management; bi-level model; VaR goal function; graphical interpretation of VaR bi-level solution (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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