Convex risk measures for portfolio optimization and concepts of flexibility

  • Authors:

  • Hans-Jakob Lüthi;Jörg Doege

  • Affiliations:

  • Department of Mathematics, Institute for Operations Research, ETH Zürich - Swiss Federal Institute of Technology, Clausiusstrasse 45/47, 8092, Zürich, Switzerland;Department of Mathematics, Institute for Operations Research, ETH Zürich - Swiss Federal Institute of Technology, Clausiusstrasse 45/47, 8092, Zürich, Switzerland

  • Venue:
  • Mathematical Programming: Series A and B
  • Year:
  • 2005

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Abstract

Due to their axiomatic foundation and their favorable computational properties convex risk measures are becoming a powerful tool in financial risk management. In this paper we will review the fundamental structural concepts of convex risk measures within the framework of convex analysis. Then we will exploit it for deriving strong duality relations in a generic portfolio optimization context. In particular, the duality relationship can be used for designing new, efficient approximation algorithms based on Nesterov's smoothing techniques for non-smooth convex optimization. Furthermore, the presented concepts enable us to formalize the notion of flexibility as the (marginal) risk absorption capacity of a technology or (available) resources.