Stress hedging in portfolio construction

Bilgili, Ferconi and Ulitsky propose a constrained portfolio optimisation approach incorporating stress scenarios

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Scenario stress testing is a useful and increasingly popular approach to assess portfolio performance under different market conditions. In this article, Mehmet Bilgili, Maurizio Ferconi and Alex Ulitsky focus on how to directly incorporate stress scenario information into portfolio construction as an additional constraint to control for potential losses and risks. To broaden the applicability of stress testing, the authors propose a robust, constrained optimisation