Worst-case VaR and robust portfolio optimization with interval random uncertainty set

Authors:
Wei Chen;Shaohua Tan;Dongqing Yang
Affiliations:
Key Laboratory of High Confidence Software Technologies (Ministry of Education), School of EECS, Peking University, Beijing 100871, China;Department of Machine Intelligence, School of EECS, Peking University, Beijing 100871, China;Key Laboratory of High Confidence Software Technologies (Ministry of Education), School of EECS, Peking University, Beijing 100871, China
Venue:
Expert Systems with Applications: An International Journal
Year:
2011

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Abstract

This paper addresses a new uncertainty set - interval random uncertainty set for worst-case value-at-risk and robust portfolio optimization. The form of interval random uncertainty set makes it suitable for capturing the downside and upside deviations of real-world data. These deviation measures capture distributional asymmetry and lead to better optimization results. We also apply our interval random chance-constrained programming to robust worst-case value-at-risk optimization under interval random uncertainty sets in the elements of mean vector and covariance matrix. Numerical experiments with real market data indicate that our approach results in better portfolio performance.