Robust portfolio optimization: a stochastic evaluation of worst-case scenarios

Paulo Rotella Junior, Luiz Célio Souza Rocha, Rogério Santana Peruchi, Giancarlo Aquila, Edson de Oliveira Pamplona, Karel Janda and Arthur Leandro Guerra Pires

Economic Research-Ekonomska Istraživanja, 2023, vol. 36, issue 3, 2165525

Abstract: This article presents a new approach for building robust portfolios based on stochastic efficiency analysis, by using the Chance Constrained Data Envelopment Analysis (CCDEA) model and periods of market downturn, i.e. worst-state market. The model is able to accommodate investors who exhibit different risk behaviors and the empirical analysis is done on assets traded on the Brazil Stock Exchange, B3 (Brasil, Bolsa, Balcão). The results confirm that the proposed model achieved portfolios that at the same time reduced systematic risk and maximized portfolio returns when working with worse market state data and higher levels of risk aversion. A higher level of risk aversion also led to better risk-return ratios, which can be seen in higher Sharpe ratio values.

Date: 2023
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Working Paper: Robust Portfolio Optimization: A Stochastic Evaluation of Worst-Case Scenarios (2022)
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DOI: 10.1080/1331677X.2023.2165525

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