Optimal and investable portfolios: An empirical analysis with scenario optimization algorithms under crisis market prospects

Mazin A.M. Al Janabi

    Research output: Contribution to journalArticlepeer-review

    25 Citations (Scopus)

    Abstract

    This paper develops scenario optimization algorithms for the assessment of investable financial portfolios under crisis market outlooks. To this end, this research study examines from portfolio managers' standpoint the performance of optimum and investable portfolios subject to applying meaningful financial and operational constraints as a result of a financial turmoil. Specifically, the paper tests a number of alternative scenarios considering both long-only and long and short-sales positions subject to minimizing the Liquidity-Adjusted Value-at-Risk (LVaR) and various financial and operational constraints such as target expected return, portfolio trading volume, close-out periods and portfolio weights. Robust optimization algorithms to set coherent asset allocations for investment management industries in emerging markets and particularly in Gulf Cooperation Council (GCC) financial markets are developed. The results show that the obtained investable portfolios lie off the efficient frontier, but that long-only portfolios appear to lie much closer to the frontier than portfolios including both long and short-sales positions. The proposed optimization algorithms can be useful in developing enterprise-wide portfolio management models in light of the aftermaths of the most-recent financial crisis. The developed methodology and risk optimization algorithms can aid in advancing portfolio management practices in emerging markets and predominantly in the wake of the latest credit crunch.

    Original languageEnglish
    Pages (from-to)369-381
    Number of pages13
    JournalEconomic Modelling
    Volume40
    DOIs
    Publication statusPublished - Jun 2014

    Keywords

    • Emerging markets
    • Financial engineering
    • Financial risk management
    • GCC financial markets
    • Liquidity-Adjusted Value-at-Risk
    • Optimization
    • Portfolio management
    • Stress testing

    ASJC Scopus subject areas

    • Economics and Econometrics

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