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Non-Gaussian optimization model for systematic portfolio allocation: How to take advantage of market turbulence?

Non-Gaussian optimization model for systematic portfolio allocation: How to take advantage of... In this paper, we show how to build a systematic quantitative portfolio allocation strategy using non-Gaussian risk metrics and market turbulence detection. We propose a 3-step approach to build a reference second-order portfolio that will be optimally rebalanced according to increasing market skewness. The reference second-order portfolio uses a robust estimate of a covariance based on a semi-definite matrix calibration and incorporates risk aversion via a moving performance target depending on the volatility of the VIX index. As such, it is a dynamic strategy balancing robustness and reactivity to market volatility changes. A convex relaxation scheme allows to re-formulate the mixed second-order/third-order optimization problem as a tractable semi-definite program. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Risk and Decision Analysis iospress

Non-Gaussian optimization model for systematic portfolio allocation: How to take advantage of market turbulence?

Risk and Decision Analysis , Volume 2 (4) – Jan 1, 2011

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Publisher
IOS Press
Copyright
Copyright © 2011 by IOS Press, Inc
ISSN
1569-7371
eISSN
1875-9173
DOI
10.3233/RDA-2011-0048
Publisher site
See Article on Publisher Site

Abstract

In this paper, we show how to build a systematic quantitative portfolio allocation strategy using non-Gaussian risk metrics and market turbulence detection. We propose a 3-step approach to build a reference second-order portfolio that will be optimally rebalanced according to increasing market skewness. The reference second-order portfolio uses a robust estimate of a covariance based on a semi-definite matrix calibration and incorporates risk aversion via a moving performance target depending on the volatility of the VIX index. As such, it is a dynamic strategy balancing robustness and reactivity to market volatility changes. A convex relaxation scheme allows to re-formulate the mixed second-order/third-order optimization problem as a tractable semi-definite program.

Journal

Risk and Decision Analysisiospress

Published: Jan 1, 2011

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