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Article

Optimal Dynamic Portfolio with Mean-CVaR Criterion

by 1 and 2,*
1
Federal Reserve Bank of New York, New York, NY 10045, USA
2
University of North Carolina at Charlotte, Department of Mathematics and Statistics, Charlotte, NC 28223, USA
*
Author to whom correspondence should be addressed.
Risks 2013, 1(3), 119-147; https://doi.org/10.3390/risks1030119
Received: 6 August 2013 / Revised: 19 October 2013 / Accepted: 4 November 2013 / Published: 11 November 2013
(This article belongs to the Special Issue Systemic Risk and Reinsurance)
Value-at-risk (VaR) and conditional value-at-risk (CVaR) are popular risk measures from academic, industrial and regulatory perspectives. The problem of minimizing CVaR is theoretically known to be of a Neyman–Pearson type binary solution. We add a constraint on expected return to investigate the mean-CVaR portfolio selection problem in a dynamic setting: the investor is faced with a Markowitz type of risk reward problem at the final horizon, where variance as a measure of risk is replaced by CVaR. Based on the complete market assumption, we give an analytical solution in general. The novelty of our solution is that it is no longer the Neyman–Pearson type, in which the final optimal portfolio takes only two values. Instead, in the case in which the portfolio value is required to be bounded from above, the optimal solution takes three values; while in the case in which there is no upper bound, the optimal investment portfolio does not exist, though a three-level portfolio still provides a sub-optimal solution. View Full-Text
Keywords: conditional value-at-risk; mean-CVaR portfolio optimization; risk minimization; Neyman–Pearson problem conditional value-at-risk; mean-CVaR portfolio optimization; risk minimization; Neyman–Pearson problem
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MDPI and ACS Style

Li, J.; Xu, M. Optimal Dynamic Portfolio with Mean-CVaR Criterion. Risks 2013, 1, 119-147. https://doi.org/10.3390/risks1030119

AMA Style

Li J, Xu M. Optimal Dynamic Portfolio with Mean-CVaR Criterion. Risks. 2013; 1(3):119-147. https://doi.org/10.3390/risks1030119

Chicago/Turabian Style

Li, Jing, and Mingxin Xu. 2013. "Optimal Dynamic Portfolio with Mean-CVaR Criterion" Risks 1, no. 3: 119-147. https://doi.org/10.3390/risks1030119

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