Portfolio Value-at-Risk Optimization for Asymmetrically Distributed Asset Returns

European Journal of Operational Research, 2012, Vol 221, 397-406

31 Pages Posted: 27 Apr 2009 Last revised: 4 Jan 2017

See all articles by Joel Goh

Joel Goh

National University of Singapore

Kian-Guan Lim

Singapore Management University - Lee Kong Chian School of Business

Melvyn Sim

National University of Singapore (NUS) - NUS Business School

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Date Written: July 22, 2012

Abstract

We propose a new approach to portfolio optimization by separating asset return distributions into positive and negative half-spaces. The approach minimizes a newly-defined Partitioned Value-at-Risk (PVaR) risk measure by using half-space statistical information. Using simulated data, the PVaR approach always generates better risk-return tradeoffs in the optimal portfolios when compared to traditional Markowitz mean-variance approach. When using real financial data, our approach also outperforms the Markowitz approach in the risk-return tradeoff. Given that the PVaR measure is also a robust risk measure, our new approach can be very useful for optimal portfolio allocations when asset return distributions are asymmetrical.

Keywords: Asymmetric Distributions, Markowitz Mean-Variance Optimization, Partitioned Value-at-Risk, Portfolio Optimization, Robust Risk Measures

JEL Classification: C46, G11

Suggested Citation

Goh, Joel and Lim, Kian-Guan and Sim, Melvyn and Zhang, Weina, Portfolio Value-at-Risk Optimization for Asymmetrically Distributed Asset Returns (July 22, 2012). European Journal of Operational Research, 2012, Vol 221, 397-406. Available at SSRN: https://ssrn.com/abstract=1394922 or http://dx.doi.org/10.2139/ssrn.1394922

Joel Goh

National University of Singapore ( email )

NUS Business School
BIZ 1 Building, #02-01, 1 Business Link
117592
Singapore

Kian-Guan Lim

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road #05-01
Singapore, 178899
Singapore

Melvyn Sim

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
356
Abstract Views
2,847
rank
90,756
PlumX Metrics