Computing near-optimal value-at-risk portfolios using integer programming techniques
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Publication:1754091
DOI10.1016/J.EJOR.2017.09.009zbMATH Open1403.91303DBLPjournals/eor/BabatVZ18arXiv2107.07339OpenAlexW2756533518WikidataQ58051135 ScholiaQ58051135MaRDI QIDQ1754091FDOQ1754091
Authors: Onur Babat, Luis Fernando Zuluaga, Juan Vera 
Publication date: 30 May 2018
Published in: European Journal of Operational Research (Search for Journal in Brave)
Abstract: Value-at-Risk (VaR) is one of the main regulatory tools used for risk management purposes. However, it is difficult to compute optimal VaR portfolios; that is, an optimal risk-reward portfolio allocation using VaR as the risk measure. This is due to VaR being non-convex and of combinatorial nature. In particular, it is well known that the VaR portfolio problem can be formulated as a mixed integer linear program (MILP) that is difficult to solve with current MILP solvers for medium to large-scale instances of the problem. Here, we present an algorithm to compute near-optimal VaR portfolios that takes advantage of this MILP formulation and provides a guarantee of the solution's near-optimality. As a byproduct, we obtain an algorithm to compute tight lower bounds on the VaR portfolio problem that outperform related algorithms proposed in the literature for this purpose. The near-optimality guarantee provided by the proposed algorithm is obtained thanks to the relation between minimum risk portfolios satisfying a reward benchmark and the corresponding maximum reward portfolios satisfying a risk benchmark. These alternate formulations of the portfolio allocation problem have been frequently studied in the case of convex risk measures and concave reward functions. Here, this relationship is considered for general risk measures and reward functions. To illustrate the efficiency of the presented algorithm, numerical results are presented using historical asset returns from the US financial market.
Full work available at URL: https://arxiv.org/abs/2107.07339
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Cited In (12)
- A difference of convex formulation of value-at-risk constrained optimization
- A one-sided Vysochanskii-Petunin inequality with financial applications
- VNS approach for solving a financial portfolio design problem
- Mean-variance-VaR portfolios: MIQP formulation and performance analysis
- Robust optimization approaches for portfolio selection: a comparative analysis
- An analysis of dollar cost averaging and market timing investment strategies
- Model and efficient algorithm for the portfolio selection problem with real‐world constraints under value‐at‐risk measure
- Comments on ``A mixed integer linear programming formulation of the optimal mean/Value-at-Risk portfolio problem
- DC programming and DCA for globally solving the value-at-risk
- Integer programming approaches in mean-risk models
- A mixed integer linear programming formulation of the optimal mean/Value-at-Risk portfolio problem
- Improved algorithms for computing worst value-at-risk
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