A mean-CVaR-skewness portfolio optimization model based on asymmetric Laplace distribution

Shangmei Zhao, Qing Lu (), Liyan Han (), Yong Liu () and Fei Hu

Annals of Operations Research, 2015, vol. 226, issue 1, 727-739

Abstract: In the presence of uncertainty of asset returns, choosing an appropriate risk measure and determining the optimal weights of assets in a portfolio remain formidable and challenging problems. In this paper, we propose and study a mean-conditional value at risk-skewness portfolio optimization model based on the asymmetric Laplace distribution, which is suitable for describing the leptokurtosis, fat-tail, and skewness characteristics of financial assets. In addition, skewness is added into the portfolio optimization model to meet the diverse needs of investors. To solve this multi-objective problem, we suggest a simplified model with exactly the same solution. This modified model greatly reduces the complexity of the problem. Therefore, the mean-conditional value at risk-skewness model can be correspondingly solved. In order to illustrate the method, we provide an application concerning the portfolio allocation of 19 constituent stocks of S&P 500 index using our model. We show that this model could make important contributions to research on investment decision making. Copyright Springer Science+Business Media New York 2015

Keywords: Conditional value-at-risk; Skewness; Asymmetric Laplace distribution; Mean-CVaR-skewness model (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (20)

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DOI: 10.1007/s10479-014-1654-y

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