Portfolio optimization for jump-diffusion risky assets with common shock dependence and state dependent risk aversion

2016 ◽  
Vol 38 (2) ◽  
pp. 229-246 ◽  
Author(s):  
Caibin Zhang ◽  
Zhibin Liang
Keyword(s):  
Risk Aversion ◽  
Portfolio Optimization ◽  
Jump Diffusion ◽  
Risky Assets ◽  
State Dependent ◽  
Common Shock

PRACTICAL INVESTMENT CONSEQUENCES OF THE SCALARIZATION PARAMETER FORMULATION IN DYNAMIC MEAN–VARIANCE PORTFOLIO OPTIMIZATION

2021 ◽  
Vol 24 (05) ◽  
pp. 2150029
Author(s):  
PIETER M. VAN STADEN ◽  
DUY-MINH DANG ◽  
PETER A. FORSYTH
Keyword(s):  
Risk Aversion ◽  
Portfolio Optimization ◽  
Optimization Problem ◽  
Jump Diffusion ◽  
Investment Strategies ◽  
Institutional Settings ◽  
Portfolio Optimization Problem ◽  
Mean Variance Portfolio ◽  
Mean Variance ◽  
Theoretical Risk

We consider the practical investment consequences of implementing the two most popular formulations of the scalarization (or risk-aversion) parameter in the time-consistent dynamic mean–variance (MV) portfolio optimization problem. Specifically, we compare results using a scalarization parameter assumed to be (i) constant and (ii) inversely proportional to the investor’s wealth. Since the link between the scalarization parameter formulation and risk preferences is known to be nontrivial (even in the case where a constant scalarization parameter is used), the comparison is viewed from the perspective of an investor who is otherwise agnostic regarding the philosophical motivations underlying the different formulations and their relation to theoretical risk-aversion considerations, and instead simply wishes to compare investment outcomes of the different strategies. In order to consider the investment problem in a realistic setting, we extend some known results to allow for the case where the risky asset follows a jump-diffusion process, and examine multiple sets of plausible investment constraints that are applied simultaneously. We show that the investment strategies obtained using a scalarization parameter that is inversely proportional to wealth, which enjoys widespread popularity in the literature applying MV optimization in institutional settings, can exhibit some undesirable and impractical characteristics.

scholarly journals The Study of Mean-Variance Risky Asset Management with State-Dependent Risk Aversion under Regime Switching Market

2021 ◽  
Vol 2021 ◽  
pp. 1-15
Author(s):  
Shuang Li ◽  
Yu Yang ◽  
Yanli Zhou ◽  
Yonghong Wu ◽  
Xiangyu Ge
Keyword(s):  
Risk Aversion ◽  
Asset Management ◽  
Regime Switching ◽  
Asset Liability Management ◽  
Risky Assets ◽  
Liability Management ◽  
State Dependent ◽  
Optimal Value ◽  
Time Inconsistent ◽  
Mean Variance

How do investors require a distribution of the wealth among multiple risky assets while facing the risk of the uncontrollable payment for random liabilities? To cope with this problem, firstly, this paper explores the approach of asset-liability management under the state-dependent risk aversion with only risky assets, which has been considered under a continuous-time Markov regime-switching setting. Next, based on this realistic modelling, an extended Hamilton-Jacob-Bellman (HJB) system has been necessarily established for solving the optimization problem of asset-liability management. It has been derived closed-form analytical expressions applied in the time-inconsistent investment with optimal control theory to see that happens to the optimal value of the function. Ultimately, numerical examples presented with comparisons of the analytical results under different market conditions are exposed to analyse numerically the developed mean variance asset liability management strategy. We find that our proposed model can explain the financial phenomena more effectively and accurately.

scholarly journals Dynamic portfolio optimization with transaction costs and state-dependent drift

2015 ◽  
Vol 243 (3) ◽  
pp. 921-931 ◽  
Author(s):  
Jan Palczewski ◽  
Rolf Poulsen ◽  
Klaus Reiner Schenk-Hoppé ◽  
Huamao Wang
Keyword(s):  
Transaction Costs ◽  
Portfolio Optimization ◽  
State Dependent ◽  
Dynamic Portfolio ◽  
Dynamic Portfolio Optimization

scholarly journals The Influence of Financial Literacy, Risk Aversion and Expectations on Retirement Planning and Portfolio Allocation in Malaysia

2017 ◽  
Vol 19 (3) ◽  
pp. 267 ◽  
Author(s):  
Nurul Shahnaz Mahdzan ◽  
Amrul Asraf Mohd-Any ◽  
Mun-Kit Chan
Keyword(s):  
Risk Aversion ◽  
Financial Literacy ◽  
Retirement Planning ◽  
Portfolio Allocation ◽  
Kuala Lumpur ◽  
Future Expectations ◽  
Risky Assets ◽  
Demographic Subgroups ◽  
Behavioural Aspects ◽  
Self Administered Questionnaire

The two objectives of this paper are to examine the effect of financial literacy, risk aversion and expectations on retirement planning; and, to investigate the effect of these antecedents on the retirement portfolio allocation. Data was collected via a self-administered questionnaire from a sample of 270 working individuals in Kuala Lumpur, Malaysia. Logistic and ordered probit regressions were employed to analyse the first and second objective, respectively.  The results from the logistic regression indicate that future expectations significantly influence the probability of planning for retirement. Meanwhile, individuals with higher financial literacy and lower risk aversion are more likely to hold risky assets in their retirement portfolios. Subsequently, two-sample t-test and one-way ANOVA tests were conducted to further examine the differences in financial literacy, risk aversion and expectations, across demographic subgroups. The study contributes to the literature by holistically incorporating the behavioural aspects that affect retirement planning and by exploring an uncharted issue of retirement planning—namely, the retirement portfolio allocation.

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