A robust approach to optimal portfolio choice with parameter uncertainty
(2021) 15th International Conference on Computational and Financial Econometrics — Location: Virtual (18.December.2021)
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- Abstract
- Many studies show that mean-variance portfolios perform poorly, delivering suboptimal average out-of-sample utility. A lesser-known fact we characterize is that their out-of-sample utility is also very volatile. Using our analytical characterization of performance volatility, we propose a robustness measure that balances out-of-sample utility mean and volatility and show that neither mean-variance portfolios nor minimum-variance portfolios offer maximal robust performance. Our robustness measure serves as a portfolio framework to construct strategies that achieve the optimal tradeoff between out-of-sample utility mean and volatility. These strategies are resilient to estimation errors and outperform portfolios that ignore parameter uncertainty or out-of-sample utility risk.
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Citations
Lassance, N., Martin-Utrera, A., & Simaan, M. (2021). A robust approach to optimal portfolio choice with parameter uncertainty. 15th International Conference on Computational and Financial Econometrics, Virtual. https://hdl.handle.net/2078.5/107704