Robustifying Conditional Portfolio Decisions via Optimal Transport
Viet Anh Nguyen (),
Fan Zhang (),
Shanshan Wang (),
José Blanchet (),
Erick Delage () and
Yinyu Ye ()
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Viet Anh Nguyen: Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong
Fan Zhang: Department of Management Science and Engineering, Stanford University, Stanford, California 94305
Shanshan Wang: School of Economics and Management, Beihang University, Beijing 100191, China
José Blanchet: Department of Management Science and Engineering, Stanford University, Stanford, California 94305
Erick Delage: Groupe d’études et de recherche en analyse des décisions (GERAD), Montreal, Quebec H3T 2A7, Canada; and Department of Decision Sciences, HEC Montréal, Montreal, Quebec H3T 2A7, Canada
Yinyu Ye: Department of Management Science and Engineering, Stanford University, Stanford, California 94305
Operations Research, 2025, vol. 73, issue 5, 2801-2829
Abstract:
We propose a data-driven portfolio selection model that integrates side information, conditional estimation, and robustness using the framework of distributionally robust optimization. Conditioning on the observed side information, the portfolio manager solves an allocation problem that minimizes the worst-case conditional risk-return tradeoff, subject to all possible perturbations of the covariate-return probability distribution in an optimal transport ambiguity set. Despite the nonlinearity of the objective function in the probability measure, we show that the distributionally robust portfolio allocation with a side information problem can be reformulated as a finite-dimensional optimization problem. If portfolio decisions are made based on either the mean-variance or the mean-conditional value-at-risk criterion, the reformulation can be further simplified to second-order or semidefinite cone programs. Empirical studies in the U.S. equity market demonstrate the advantage of our integrative framework against other benchmarks.
Keywords: Optimization; contextual optimization; distributionally robust optimization; portfolio optimization; decision-making with side information (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:73:y:2025:i:5:p:2801-2829
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