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Constructing Risk Measures from Uncertainty Sets
Journal article   Peer reviewed

Constructing Risk Measures from Uncertainty Sets

Karthik Natarajan, Dessislava Pachamanova and Melvyn Sim
Operations research, Vol.57(5), pp.1129-1141
01/09/2009

Abstract

Business & Economics Management Operations Research & Management Science Science & Technology Social Sciences Technology
We illustrate the correspondence between uncertainty sets in robust optimization and some popular risk measures in finance and show how robust optimization can be used to generalize the concepts of these risk measures. We also show that by using properly defined uncertainty sets in robust optimization models, one can construct coherent risk measures and address the issue of the computational tractability of the resulting formulations. Our results have implications for efficient portfolio optimization under different measures of risk.

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