EconPapers    
Economics at your fingertips  
 

Managing ambiguity in asset allocation

Hakan Kaya ()
Additional contact information
Hakan Kaya: Neuberger Berman

Journal of Asset Management, 2017, vol. 18, issue 3, 163-187

Abstract: Abstract This paper is about the issue of input parameter uncertainty in portfolio optimization in a discrete setting with finite states (such as the case in a world with different macroeconomic regimes). In such a setting, being unable to assign reliable point estimates to the probabilities (or frequencies) of the states creates the ambiguity. We first describe how this ambiguity can be modeled probabilistically. Then, we show how this added uncertainty can be dealt with in optimal asset allocation problems. In simple-yet-realistic example applications we demonstrate that without sacrificing much of the upside, ambiguity managed portfolios may enhance the uniformity of returns across different states when compared to portfolios constructed by traditional methods. We stress that a key conclusion to be taken from these methods builds the case for insurance-like and potentially negative-yielding investments such as bonds and commodities so as to hedge the unforeseeable macrouncertainties for a smoother portfolio performance. Finally, we offer a variety of problem domains in which ambiguity management can be nested including macroeconomic scenario-based asset allocation, investing with regime-switching models, momentum investing, and risk-based investing.

Keywords: robust portfolio optimization; Dirichlet distribution; risk management; ambiguity; parameter uncertainty; information theory; portfolio construction; minimax (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1057/s41260-016-0029-0 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:pal:assmgt:v:18:y:2017:i:3:d:10.1057_s41260-016-0029-0

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260

Access Statistics for this article

Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo

More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2019-11-06
Handle: RePEc:pal:assmgt:v:18:y:2017:i:3:d:10.1057_s41260-016-0029-0