Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/128437
Authors: 
Rankovic, Vladimir
Drenovak, Mikica
Uroševic, Branko
Jelic, Ranko
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 5731
Abstract: 
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.
Subjects: 
portfolio optimization
actual portfolios
value at risk
GARCH
NSGA-II
JEL: 
C61
Document Type: 
Working Paper

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