Closed-form solutions for worst-case law invariant risk measures with application to robust portfolio optimization

Worst-case risk measures refer to the calculation of the largest value for risk measures when only partial information of the underlying distribution is available. For the popular risk measures such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR), it is now known that their worst-case counterparts can be evaluated in closed form when only the first two moments are known for the underlying distribution. We show in this paper that somewhat surprisingly similar closed-form solutions also exist for the general class of law invariant coherent risk measures, which consists of spectral risk measures as special cases that are arguably the most important extensions of CVaR. We characterize the worst-case distributions that offer great intuition related to one's choice of risk spectrum. As applications of the closed-form results, new formulas are derived for tight bounds on higher order risk measures, as well as robust portfolio optimization models.

Article

Download

View Closed-form solutions for worst-case law invariant risk measures with application to robust portfolio optimization