Mean-Variance Hybrid Portfolio Optimization with Quantile-Based Risk Measure
35 Pages Posted: 12 Feb 2021 Last revised: 3 Apr 2023
Date Written: December 15, 2020
Abstract
This paper addresses the importance of incorporating various risk measures in portfolio management and proposes a dynamic hybrid portfolio optimization model that combines the spectral risk measure and the Value-at-Risk in the mean-variance formulation. By utilizing the quantile optimization technique and martingale representation, we offer a solution framework for these issues and also develop a closed-form portfolio policy when all market parameters are deterministic. Our hybrid model outperforms the classical continuous-time mean-variance portfolio policy by allocating a higher position of the risky asset in favorable market states and a less risky asset in unfavorable market states. This desirable property leads to promising numerical experiment results, including improved Sortino ratio and reduced downside risk compared to the benchmark models.
Keywords: Portfolio optimization; Dynamic mean-variance portfolio selection; Multiple risk measures; Spectral risk measure; Value-at-risk
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