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Inverse portfolio problem with coherent risk measures

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journal contribution
posted on 23.12.2015, 13:36 by Bogdan Grechuk, M. Zabarankin
In general, a portfolio problem minimizes risk (or negative utility) of a portfolio of financial assets with respect to portfolio weights subject to a budget constraint. The inverse portfolio problem then arises when an investor assumes that his/her risk preferences have a numerical representation in the form of a certain class of functionals, e.g. in the form of expected utility, coherent risk measure or mean-deviation functional, and aims to identify such a functional, whose minimization results in a portfolio, e.g. a market index, that he/she is most satisfied with. In this work, the portfolio risk is determined by a coherent risk measure, and the rate of return of investor’s preferred portfolio is assumed to be known. The inverse portfolio problem then recovers investor’s coherent risk measure either through finding a convex set of feasible probability measures (risk envelope) or in the form of either mixed CVaR or negative Yaari’s dual utility. It is solved in single-period and multi-period formulations and is demonstrated in a case study with the FTSE 100 index.

History

Citation

European Journal of Operational Research, 2016, 249, pp. 740-750

Author affiliation

/Organisation/COLLEGE OF SCIENCE AND ENGINEERING/Department of Mathematics

Version

AM (Accepted Manuscript)

Published in

European Journal of Operational Research

Publisher

Elsevier

issn

0377-2217

Acceptance date

23/09/2015

Available date

09/10/2018

Publisher version

http://www.sciencedirect.com/science/article/pii/S0377221715008929

Language

en