On the feasibility of portfolio optimization under expected shortfall

Stefano Ciliberti, Imre Kondor () and Marc Mezard

Quantitative Finance, 2007, vol. 7, issue 4, 389-396

Abstract: We address the problem of portfolio optimization under the simplest coherent risk measure, i.e. the expected shortfall. As is well known, one can map this problem into a linear programming setting. For some values of the external parameters, when the available time series is too short, portfolio optimization is ill-posed because it leads to unbounded positions, infinitely short on some assets and infinitely long on others. As first observed by Kondor and coworkers, this phenomenon is actually a phase transition. We investigate the nature of this transition by means of a replica approach.

Keywords: Statistical physics; Finance; Portfolio optimization; Quantitative finance; Correlation modelling; Critical phenomena; Risk measures (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (29)

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Working Paper: On the Feasibility of Portfolio Optimization under Expected Shortfall (2006)
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DOI: 10.1080/14697680701422089

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