A Stochastic Programming Framework for International PortfolioManagement

Hercules Vladimirou (), Nikolas Topaloglou and Stavros Zenios
Additional contact information
Hercules Vladimirou: Dept. Public & Business Administration University of Cyprus

No 404, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: We present a multi-stage stochastic programming model for managing portfolios of stock and bond indices denominated in multiple currencies. The portfolios are exposed to market risks and currency risks. Uncertainty in asset returns and exchange rates is represented by means of discrete distributions (scenario sets) in a way that captures empirically observed asymmetries and fat tails in the distributions of these random variables and their correlations. The stochastic programming model takes a holistic view of the problem and determines the optimal asset allocation as well as risk hedging decisions by means of forward contracts and options. The options are priced consistently with the postulated scenario sets for the underlying securities, while also satisfying fundamental non-arbitrage principles. The modeling framework provides a basis to investigate the performance of alternative risk management strategies. Through extensive computational experiments, both in static as well as in dynamic settings we demonstrate (a) the benefits of international diversification, (b) the impact of alternative hedging strategies – including options – to control the main risk exposures, (c) the relative performance of alternative risk hedging strategies and alternative model forms. We find that additional benefits are gained as a progressively integrated view towards total risk management is taken, i.e., as the constituent risks are jointly controlled through appropriate means.

Keywords: international portfolios; stochastic prorgamming; risk management (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 G15 (search for similar items in EconPapers)
Date: 2006-07-04
References: Add references at CitEc
Citations: View citations in EconPapers (1)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:sce:scecfa:404

Access Statistics for this paper

More papers in Computing in Economics and Finance 2006 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().