Shift-Aware Gaussian-Supremum Validation for Wasserstein-DRO CVaR Portfolios

TL;DR

This paper introduces a shift-aware Gaussian-supremum validation framework for Wasserstein-DRO CVaR portfolios, improving robustness under distribution shifts and serial dependence in financial data.

Contribution

It develops a novel validation method that calibrates portfolio risk under distribution shift, extending theoretical guarantees to dependent financial data.

Findings

Improved return-risk trade-offs over baseline methods

Theoretical extension to non-i.i.d. financial data

Effective calibration of CVaR constraints under dependence

Abstract

We study portfolio selection with a Conditional Value-at-Risk (CVaR) constraint under distribution shift and serial dependence. While Wasserstein distributionally robust optimization (DRO) offers tractable protection via an ambiguity ball around empirical data, choosing the ball radius is delicate: large radii are conservative, small radii risk violation under regime change. We propose a shift-aware Gaussian-supremum (GS) validation framework for Wasserstein-DRO CVaR portfolios, building on the work by Lam and Qian (2019). Phase I of the framework generates a candidate path by solving the exact reformulation of the robust CVaR constraint over a grid of Wasserstein radii. Phase II of the framework learns a target deployment law $Q$ by density-ratio reweighting of a time-ordered validation fold, computes weighted CVaR estimates, and calibrates a simultaneous upper confidence band via a block multiplier bootstrap to account for dependence. We select the least conservative feasible portfolio (or abstain if the effective sample size collapses). Theoretically, we extend the normalized GS validator to non-i.i.d. financial data: under weak dependence and regularity of the weighted scores, any portfolio passing our validator satisfies the CVaR limit under $Q$ with probability at least $1-\beta$; the Wasserstein term contributes a deterministic margin $(\delta/\alpha)\|x\|_*$. Empirical results indicate improved return-risk trade-offs versus the naive baseline.