escholarship uc item 5pp7z1z8

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Center for Risk Management Research

UC Berkeley

Title:Fragility of CVaR in portfolio optimization

Author:

Lim, A.E.B., UC BerkeleyShanthikumar, J.G., Purdue UniversityVahn, G.-Y., UC Berkeley

Publication Date:

09-21-2009

Series:

Coleman Fung Risk Management Research Center Working Papers 2006-2013

Permalink:

http://escholarship.org/uc/item/5pp7z1z8

Keywords:

portfolio optimization, conditional value-at-risk, expected shortfall, TailVaR, coherent measuresof risk, mean-CVaR optimization, mean-variance optimization, global minimum CVaR, globalminimum variance, estimation errors

Abstract:

Abstract We evaluate conditional value-at-risk (CVaR) as a risk measure in data-driven portfoliooptimization. We show that portfolios obtained by solving mean-CVaR and global minimum CVaRproblems are unreliable due to estimation errors of CVaR and/or the mean, which are aggravated

by optimization. This prob- lem is exacerbated when the tail of the return distribution is madeheavier. We conclude that CVaR, a coherent risk measure, is fragile in portfolio optimization dueto estimation errors.

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University of CaliforniaBerkeley

Working Paper # 2009 -08

Fragility of CVar

in portfolio optimization

A.E.B. Lim, UC BerkeleyJ.G. Shanthikumar, Purdue Universit

G.-Y. Vahn, UC Berkeley

September 21,2007


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escholarship uc item 5pp7z1z8

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