Robust optimization has become a widely implemented approach in investment management for incorporating uncertainty into financial models. The first applications were to asset allocation and equity portfolio construction. Significant advancements in robust portfolio optimization took place since it gained popularity almost two decades ago for improving classical models on portfolio optimization. Recently, studies applying the worst-case framework to bond portfolio construction, currency hedging, and option pricing have appeared in the practitioner-oriented literature. Our focus in this paper is on recent advancements to categorize robust optimization models into asset allocation at the asset class level and portfolio selection at the individual asset level, and we further separate robust portfolio selection approaches specific to each asset class. This organization provides a clear overview on how robust optimization is extensively implemented in investment management.
Annals of Operations Research – Springer Journals
Published: Aug 20, 2017
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