Type of Document Dissertation Author Tian, Ruilin Author's Email Address ruilin.tian@gmail.com URN etd-05072008-150619 Title MOMENT PROBLEMS WITH APPLICATIONS TO VALUE-AT-RISK AND PORTFOLIO MANAGEMENT Degree Ph.D. Department Risk Management and Insurance Advisory Committee
Advisor Name Title Dr. Samuel H. Cox Committee Chair Dr. Adam Speight Committee Member Dr. Eric Ulm Committee Member Dr. Luis F. Zuluaga Committee Member Dr. Shaun Wang Committee Member Keywords
- CVaR
- VaR
- moment problem
- semidefinite programming
- semiparametric bounds
- maximum entropy
- portfolio management
Date of Defense 2008-04-17 Availability unrestricted Abstract MOMENT PROBLEMS WITH APPLICATIONS TO VALUE-AT-RISK AND PORTFOLIO MANAGEMENT
By
Ruilin Tian
May 2008
Committee Chair: Dr. Samuel H. Cox
Major Department: Risk Management and Insurance
My dissertation provides new applications of moment theory and optimization to financial and insurance risk management. In the investment and managerial areas, one often needs to determine some measure of risk, especially the risk of extreme events. However, complete information of the underlying outcomes is usually unavailable; instead one has access to partial information such as the mean, variance, mode, or range. In Chapters 2 and 3, we find the semiparametric upper and lower bounds for the value-at-risk (VaR) with incomplete information, that is, moments of the underlying distribution.
When a single variable is concerned, bounds on VaR are computed to obtain a 100% confidence interval. When the sample financial data have a global maximum, we show that unimodal assumption tightens the optimal bounds. Next we further analyze a function of two correlated random variables. Specifically, we find bounds on the probability of two joint extreme events. When three or more variables are involved, the multivariate problem can sometimes be converted to a single variable problem. In all cases, we use the physical measure rather than the commonly used equivalent pricing probability measure. In addition to solving these problems using the traditional approach based on the geometry of a moment problem, a more efficient method is proposed to solve a general class of moment bounds via semidefinite programming.
In the last part of the thesis, we apply optimization techniques to improve financial portfolio risk management. Instead of considering VaR, we work with a coherent risk measure, the conditional VaR (CVaR). As an extension of Krokhmal et al. (2002), we impose CVaR-related functions to the portfolio selection problem. The CVaR approach sets a β-level CVaR as the objective function and maximizes the worst case on the tail of the distribution. The CVaR-like constraints approach adds a set of CVaR-like constraints to the traditional Markowitz problem, reshaping the portfolio distribution. Both methods greatly increase the skewness of portfolios, although the CVaR approach may lose control of the variance. This capability of increasing skewness is very attractive to the investors who may prefer higher probability of obtaining higher returns. We compare the CVaR-related approaches to some other popular portfolio optimization methods. Our numerical analysis provides empirical support for the superiority of the CVaR-like constraints approach in terms of portfolio efficiency.
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