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research article

Dynamic Mean-Variance Portfolio Analysis under Model Risk

Kuhn, Daniel  
•
Parpas, Panos
•
Rustem, Berç
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2009
Journal of Computational Finance

The classical Markowitz approach to portfolio selection is compromised by two major shortcomings. First, there is considerable model risk with respect to the distribution of asset returns. Particularly, mean returns are notoriously difficult to estimate. Moreover, the Markowitz approach is static in that it does not account for the possibility of portfolio rebalancing within the investment horizon. We propose a robust dynamic portfolio optimization model to overcome both shortcomings. The model arises from an infinite-dimensional min-max framework. The objective is to minimize the worst-case portfolio variance over a family of dynamic investment strategies subject to a return target constraint. The worst-case variance is evaluated with respect to a set of conceivable return distributions. We develop a quantitative approach to approximate this intractable problem by a tractable one and report on numerical experiments.

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Type
research article
DOI
10.21314/JCF.2009.202
Author(s)
Kuhn, Daniel  
Parpas, Panos
Rustem, Berç
Fonseca, Raquel
Date Issued

2009

Published in
Journal of Computational Finance
Volume

12

Issue

4

Start page

91

End page

115

Editorial or Peer reviewed

NON-REVIEWED

Written at

OTHER

EPFL units
RAO  
Available on Infoscience
January 21, 2014
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/100082
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