Title: Optimal dynamic asset allocation with lower partial moments criteria and affine policies

Authors: Giuseppe Carlo Calafiore

Addresses: Dipartimento di Automatica e Informatica, Politecnico di Torino, Torino, Italy

Abstract: This paper discusses an optimisation-based approach for solving multi-period dynamic asset allocation problems using empirical asymmetric measures of risk. Three features distinguish the proposed approach from the mainstream ones. First, our approach is non-parametric, in the sense that it does not require explicit estimation of the parameters of a statistical model for the returns distribution: the approach relies directly on data (the scenarios) generated by an oracle which may include expert knowledge along with a standard stochastic return model. Second, it employs affine decision policies, which make the multi-period formulation of the problem amenable to an efficient convex optimisation format. Third, it uses asymmetric, unilateral measures of risk which, unlike standard symmetric measures such as variance, capture the fact that investors are usually not averse to return deviations from the expected target, if these deviations actually exceed the target.

Keywords: dynamic asset allocation; multi-period portfolio optimisation; asymmetric risk measures; optimisation with recourse; scenario optimisation; convex optimisation; lower partial moments; affine decision policies; return deviations; stochastic modelling.

DOI: 10.1504/IJFERM.2015.074040

International Journal of Financial Engineering and Risk Management, 2015 Vol.2 No.2, pp.87 - 108

Received: 05 Mar 2015
Accepted: 02 Aug 2015
Published online: 03 Jan 2016 *

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