Calculating CVaR and bPOE for common probability distributions with application to portfolio optimization and density estimation

DOI10.1007/S10479-019-03373-1zbMATH Open1475.91404arXiv1811.11301OpenAlexW2981878202WikidataQ126981309 ScholiaQ126981309MaRDI QIDQ2241122FDOQ2241122

Authors: Matthew Norton, Valentyn Khokhlov, Stan Uryasev 

Publication date: 8 November 2021

Published in: Annals of Operations Research (Search for Journal in Brave)

Abstract: Conditional Value-at-Risk (CVaR) and Value-at-Risk (VaR), also called the superquantile and quantile, are frequently used to characterize the tails of probability distribution's and are popular measures of risk. Buffered Probability of Exceedance (bPOE) is a recently introduced characterization of the tail which is the inverse of CVaR, much like the CDF is the inverse of the quantile. These quantities can prove very useful as the basis for a variety of risk-averse parametric engineering approaches. Their use, however, is often made difficult by the lack of well-known closed-form equations for calculating these quantities for commonly used probability distribution's. In this paper, we derive formulas for the superquantile and bPOE for a variety of common univariate probability distribution's. Besides providing a useful collection within a single reference, we use these formulas to incorporate the superquantile and bPOE into parametric procedures. In particular, we consider two: portfolio optimization and density estimation. First, when portfolio returns are assumed to follow particular distribution families, we show that finding the optimal portfolio via minimization of bPOE has advantages over superquantile minimization. We show that, given a fixed threshold, a single portfolio is the minimal bPOE portfolio for an entire class of distribution's simultaneously. Second, we apply our formulas to parametric density estimation and propose the method of superquantile's (MOS), a simple variation of the method of moment's (MM) where moment's are replaced by superquantile's at different confidence levels. With the freedom to select various combinations of confidence levels, MOS allows the user to focus the fitting procedure on different portions of the distribution, such as the tail when fitting heavy-tailed asymmetric data.

Full work available at URL: https://arxiv.org/abs/1811.11301

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zbMATH Keywords

density estimationportfolio optimizationconditional value-at-risksuperquantilebuffered probability of exceedance

Mathematics Subject Classification ID

Probability distributions: general theory (60E05) Point estimation (62F10) Statistical methods; risk measures (91G70) Nonlinear programming (90C30) Portfolio theory (91G10)

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Cited In (12)

• Efficient and robust optimal design for quantile regression based on linear programming
• Generalized PELVE and applications to risk measures
• Globalized distributionally robust optimization problems under the moment-based framework
• A methodology to estimate the optimal debt ratio when asset returns, and default probability follow stochastic processes
• Ellipsoidal buffered area under the curve maximization model with variable selection in credit risk estimation
• A tail measure with variable risk tolerance: application in dynamic portfolio insurance strategy
• Bregman superquantiles. Estimation methods and applications
• Buffered and reduced multidimensional distribution functions and their application in optimization
• A hybrid algorithm for portfolio selection: an application on the Dow Jones Index (DJI)
• Bayesian CV@R/super-quantile regression
• Buffered-ranking intervals for virtual profit efficiency analysis
• Fitting heavy-tailed mixture models with CVaR constraints

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