Download or read book Portfolio Selection Under Partial Observation and Constant Absolute Risk Aversion written by Simon Brendle and published by . This book was released on 2004 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study an optimal investment problem under incomplete information for an investor with constant absolute risk aversion. We assume that the investor can only observe the asset prices, but not the instantaneous returns. We further assume that the instantaneous returns follow an Ornstein-Uhlenbeck process with Gaussian initial distribution. We analytically solve the Bellman equation for this problem, and identify the optimal portfolio strategy under incomplete information. We explore the link between the value function under partial observation and the value function under full observation, and calculate the economic value of information. Furthermore, we discuss how the optimal strategy under partial observation is related to the optimal strategy for an investor with full observation. In the framework of a two asset model, we derive explicit formulas for the value functions under both partial and full observation. We also provide an explicit formula for the economic value of information. Finally, we compute the value function and the optimal portfolio strategy for general non-Gaussian prior distributions.
Download or read book Portfolio Selection Under Partial Observation and Constant Relative Risk Aversion written by Simon Brendle and published by . This book was released on 2004 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper is concerned with an optimal investment problem under incomplete information for an investor with constant relative risk aversion. We assume that the investor can only observe the asset prices, but not their instantaneous returns. The instantaneous returns are modeled by an Ornstein-Uhlenbeck process. We first assume that the initial distribution is Gaussian. In this case, we analytically solve the Bellman equation, and identify the optimal investment strategy under incomplete information. We study the relationship between the value function under partial observation and the value function under full observation, and derive a formula for the economic value of information. Furthermore, we outline how the optimal strategy under partial observation can be computed from the optimal strategy for an investor with full observation.In market with only one risky asset, we are able to derive closed form expressions for the value functions under both partial and full observation. We also provide an explicit formula for the economic value of information.Finally, we point out how our results in the Gaussian case can be extended to general non-Gaussian initial distributions.
Download or read book Behavioral Portfolio Choice Under Hyperbolic Absolute Risk Aversion written by Marcos Escobar and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the optimal investment problem for a behavioral investor with probability distortion functions and an S-shaped utility function whose utility on gains satisfies the Inada condition at infinity, albeit not necessarily at zero, in a complete continuous-time financial market model. In particular, a piecewise utility function with hyperbolic absolute risk aversion (HARA) is applied. The considered behavioral framework, Cumulative Prospect Theory (CPT), was originally introduced by Tversky and Kahneman (1992). The utility model allows for increasing, constant or decreasing relative risk aversion. The continuous-time portfolio selection problem under the S-shaped HARA utility function in combination with probability distortion functions on gains and losses is solved theoretically for the first time, the optimal terminal wealth and its replicating wealth process and investment strategy are stated. In addition, conditions on the utility and the probability distortion functions for well-posedness and closed-form solutions are provided. A specific probability distortion function family is presented which fulfills all those requirements. This generalizes the work by Jin and Zhou (2008). Finally, a numerical case study is carried out to illustrate the impact of the utility function and the probability distortion functions.
Download or read book Portfolio Selection with Random Risk Preference written by Turan Bulmus and published by LAP Lambert Academic Publishing. This book was released on 2010-03 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, I analyzed a single-period portfolio selection problem where the investor maximizes the expected utility of the terminal wealth. The utility function is exponential, but the Pratt-Arrow measure of absolute risk aversion or risk tolerance is random. This is due to the random variations in individual s decisions concerning stochastic choice. It is well- known that the investor is memoryless in wealth for exponential utility functions with a constant risk tolerance. In other words, the investment portfolio consisting of risky stocks does not depend on the level of wealth. However, it is shown that this is no longer true if risk tolerance is random. A number of interesting characterizations on the structure of the optimal policy are obtained
Download or read book Portfolio Selection with Return Predictability and Periodically Observable Predictive Variables written by Hong Liu and published by . This book was released on 2009 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the optimal portfolio selection problem for a constant relative risk aversion (CRRA) investor who derives utility from his terminal wealth. The stock returns are predictable, but the predictive variables are only periodically observable with noise. We obtain the investor's value function in an explicit form. The theoretical results are then used to study an empirical model after calibration. We show that lack of continuous or precise observation of the predictive variables has a large impact on the optimal trading strategy. We demonstrate how information value changes with risk aversion, investment horizon, observation error volatility and other parameters. In addition, we find that although the benefit of incorporating predictability is significantly reduced due to the periodic and noisy observation, the cost of ignoring predictability is still substantial.
Download or read book Asset Pricing and Portfolio Choice Theory written by Kerry Back and published by Oxford University Press, USA. This book was released on 2010 with total page 504 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book covers the classical results on single-period, discrete-time, and continuous-time models of portfolio choice and asset pricing. It also treats asymmetric information, production models, various proposed explanations for the equity premium puzzle, and topics important for behavioral finance.
Download or read book Economic and Financial Decisions under Risk written by Louis Eeckhoudt and published by Princeton University Press. This book was released on 2011-10-30 with total page 245 pages. Available in PDF, EPUB and Kindle. Book excerpt: An understanding of risk and how to deal with it is an essential part of modern economics. Whether liability litigation for pharmaceutical firms or an individual's having insufficient wealth to retire, risk is something that can be recognized, quantified, analyzed, treated--and incorporated into our decision-making processes. This book represents a concise summary of basic multiperiod decision-making under risk. Its detailed coverage of a broad range of topics is ideally suited for use in advanced undergraduate and introductory graduate courses either as a self-contained text, or the introductory chapters combined with a selection of later chapters can represent core reading in courses on macroeconomics, insurance, portfolio choice, or asset pricing. The authors start with the fundamentals of risk measurement and risk aversion. They then apply these concepts to insurance decisions and portfolio choice in a one-period model. After examining these decisions in their one-period setting, they devote most of the book to a multiperiod context, which adds the long-term perspective most risk management analyses require. Each chapter concludes with a discussion of the relevant literature and a set of problems. The book presents a thoroughly accessible introduction to risk, bridging the gap between the traditionally separate economics and finance literatures.
Download or read book Measuring Risk Aversion written by Donald J. Meyer and published by Now Publishers Inc. This book was released on 2006 with total page 112 pages. Available in PDF, EPUB and Kindle. Book excerpt: Provides a detailed discussion of the adjustment of risk references and how to go about making such adjustments to a common scale. By adjusting all information to this common scale, results across studies can be easily summarized and compared, and the body of information concerning risk aversion can be examined as a whole
Download or read book Location Scale Portfolio Selection with Factor Recentered Skew Normal Asset Returns written by Quan Gan and published by . This book was released on 2014 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the single period portfolio selection problem on the location-scale return family. The skew normal distribution, after recentering and reparameterization, is shown to be in this family. The recentered and reparameterized distribution, called factor-recentered skew normal, can be expressed as a skew factor model which is characterized by a location parameter and two scale parameters. Risk preference on scale parameter is non-monotonic and risk averse investors prefer larger (smaller) scale when the scale is negative (positive). The three-parameter efficient set is a part of conical surface bounded by two lines. Positive-skewness portfolios and negative-skewness portfolios do not coexist in the efficient set. Numerical cases under constant absolute risk aversion are analyzed with its closed-form certainty equivalent. An asset pricing formula which nests the CAPM is obtained.
Download or read book Portfolio Choice Problems written by Nicolas Chapados and published by Springer Science & Business Media. This book was released on 2011-07-12 with total page 107 pages. Available in PDF, EPUB and Kindle. Book excerpt: This brief offers a broad, yet concise, coverage of portfolio choice, containing both application-oriented and academic results, along with abundant pointers to the literature for further study. It cuts through many strands of the subject, presenting not only the classical results from financial economics but also approaches originating from information theory, machine learning and operations research. This compact treatment of the topic will be valuable to students entering the field, as well as practitioners looking for a broad coverage of the topic.
Download or read book Robust Mean Variance Portfolio Selection with State Dependent Ambiguity Aversion and Risk Aversion written by Bingyan Han and published by . This book was released on 2019 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies a class of robust mean-variance portfolio selection problems with state-dependent risk aversion. Model uncertainty, in the sense of considering alternative dominated models, is introduced to the problem to reflect the investor's ambiguity aversion. To characterize the robust portfolios, we consider closed-loop equilibrium control and spike variation approaches. Moreover, we show that the closed-loop equilibrium strategy exists and is unique under some technical conditions. That partially addresses the open problem left in Björk et al. (2017, Finance Stoch.) and Pun (2018, Automatica). By using the necessary and sufficient condition for the equilibrium, we manage to derive the analytical form of the equilibrium strategy via the unique solution to a nonlinear ordinary differential equation system. To validate the proposed closed-loop framework, we show that when there is no ambiguity, our equilibrium strategy is reduced to the strategy in Björk et al. (2014, Math. Finance), which cannot be deduced under the open-loop control framework.
Download or read book The Impact of Estimation Error on Portfolio Selection for Investors with Constant Relative Risk Aversion written by Christoffer Bengtsson and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Portfolio Selection written by Harry Markowitz and published by Yale University Press. This book was released on 2008-10-01 with total page 369 pages. Available in PDF, EPUB and Kindle. Book excerpt: Embracing finance, economics, operations research, and computers, this book applies modern techniques of analysis and computation to find combinations of securities that best meet the needs of private or institutional investors.
Download or read book Optimal Portfolio Choice Under Loss Aversion written by Arjan B. Berkelaar and published by . This book was released on 2018 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses the optimal investment strategy for loss averse investors, assuming a complete market and general Ito processes for the asset prices. The loss averse investor follows a partial portfolio insurance strategy. When the planning horizon of the investor is short, i.e. less than 5 years, he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility. Consistent with popular investment advice, the initial portfolio weight of stocks of a loss averse investor typically increases with the investment horizon. The empirical section of the paper estimates the level of loss aversion implied by historical US stock market data, using a representative agent model. We find that loss aversion and risk aversion cannot be disentangled and provide a similar fit to the data.
Download or read book Higher Order Risk Preferences Constant Relative Risk Aversion and the Optimal Portfolio Allocation written by Trino Manuel Ñíguez and published by . This book was released on 2015 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We derive the conditions for the optimal portfolio choice within a constant relative risk aversion type of utility function considering alternative probability distributions that are able to capture the asymmetric and leptokurtic features of asset returns. We illustrate the role -- beyond risk aversion -- played by higher-order moments in the optimal decision to form a portfolio of risky assets. In particular, we show that higher-order risk attitudes such as prudence and temperance associated with the third and fourth moments of the distribution define different optimal portfolios than those constrained under risk aversion.
Download or read book Portfolio Selection by Second Order Stochastic Dominance Based on the Risk Aversion Degree of Investors written by Leili Javanmardi and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book An Exact Solution to the Portfolio Choice Problem Under Transactions Costs written by Bernard Dumas and published by . This book was released on 1989 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:
