A Linear Stochastic Programming Model for Optimal Leveraged Portfolio Selection

Davi Michel Valladão (), Álvaro Veiga and Alexandre Street
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Davi Michel Valladão: Pontifical Catholic University of Rio de Janeiro
Álvaro Veiga: Pontifical Catholic University of Rio de Janeiro
Alexandre Street: Pontifical Catholic University of Rio de Janeiro

Computational Economics, 2018, vol. 51, issue 4, No 13, 1032 pages

Abstract: Abstract The literature of portfolio optimization is extensive and covers several important aspects of the asset allocation problem. However, previous works consider simplified linear borrowing cost functions that leads to suboptimal allocations. This paper aims at efficiently solving the leveraged portfolio selection problem with a thorough borrowing cost representation comprising a number lenders with different rates and credit limits. We propose a two-stage stochastic programming model for asset and debt allocation considering a CVaR-based risk constraint and a convex piecewise-linear borrowing cost function. We compare our model to its counterpart with the fixed borrowing rate approximation used in literature. Numerical results show our model significantly improves performance in terms of risk-return trade-off.

Keywords: Leveraged portfolio selection; Efficient frontier; Stochastic programming; Conditional value-at-risk (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10614-017-9656-x

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