Portfolio optimization under expected shortfall: contour maps of estimation error

DOI10.1080/14697688.2017.1390245zbMATH Open1400.91531arXiv1510.04943OpenAlexW2162306776MaRDI QIDQ4554495FDOQ4554495

Authors: Imre Kondor, Gábor Papp, Fabio Caccioli 

Publication date: 14 November 2018

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: The contour maps of the error of historical resp. parametric estimates for large random portfolios optimized under the risk measure Expected Shortfall (ES) are constructed. Similar maps for the sensitivity of the portfolio weights to small changes in the returns as well as the VaR of the ES-optimized portfolio are also presented, along with results for the distribution of portfolio weights over the random samples and for the out-of-sample and in-the-sample estimates for ES. The contour maps allow one to quantitatively determine the sample size (the length of the time series) required by the optimization for a given number of different assets in the portfolio, at a given confidence level and a given level of relative estimation error. The necessary sample sizes invariably turn out to be unrealistically large for any reasonable choice of the number of assets and the confidence level. These results are obtained via analytical calculations based on methods borrowed from the statistical physics of random systems, supported by numerical simulations.

Full work available at URL: https://arxiv.org/abs/1510.04943

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zbMATH Keywords

expected shortfallestimation errorreplica method

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Portfolio theory (91G10)

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Cited In (3)

• On the feasibility of portfolio optimization under expected shortfall
• Bias-variance trade-off in portfolio optimization under expected shortfall with $ \newcommand{\e}{{\rm e}} {\ell_2}$ regularization
• Analytic solution to variance optimization with no short positions

Uses Software

• ElemStatLearn

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