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Title: Mean-univariate GARCH VaR portfolio optimization: Actual portfolio approach
Authors: Ranković, Vladimir
Drenovak, Mikica
Urosevic B.
Jelic, Ratomir
Issue Date: 2016
Abstract: © 2016 The Authors. In accordance with Basel Capital Accords, the Capital Requirements (CR) for market risk exposure of banks is a nonlinear function of Value-at-Risk (VaR). Importantly, the CR is calculated based on a bank's actual portfolio, i.e. the portfolio represented by its current holdings. To tackle mean-VaR portfolio optimization within the actual portfolio framework (APF), we propose a novel mean-VaR optimization method where VaR is estimated using a univariate Generalized AutoRegressive Conditional Heteroscedasticity (GARCH) volatility model. The optimization was performed by employing a Nondominated Sorting Genetic Algorithm (NSGA-II). On a sample of 40 large US stocks, our procedure provided superior mean-VaR trade-offs compared to those obtained from applying more customary mean-multivariate GARCH and historical VaR models. The results hold true in both low and high volatility samples.
Type: article
DOI: 10.1016/j.cor.2016.01.014
ISSN: 0305-0548
SCOPUS: 2-s2.0-84959514497
Appears in Collections:Faculty of Economics, Kragujevac

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