Second Order Stochastic Dominance, Reward-Risk Portfolio Selection and the CAPM

Giorgi, Enrico G. De; Post, Thierry

doi:10.2139/ssrn.643481

Cited by 23 publications

(28 citation statements)

References 43 publications

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“…A portfolio selection model (without loss control) is therefore to solve the following optimization problem 4 Maximize V (X − B)…”

Section: Formulation Of the Modelmentioning

confidence: 99%

“…3 In it is assumed that B = 0 without loss of generality. 4 If X * is an optimal solution to the problem, then the optimal portfolio is the one that replicates X * , owing to the market completeness. An optimal terminal wealth profile is usually more revealing than the corresponding portfolio about the trading behaviors of the agent.…”

Section: Formulation Of the Modelmentioning

confidence: 99%

“…There have been burgeoning research interests in incorporating these new theories into portfolio choice; nonetheless these have been overwhelmingly limited to the singleperiod setting; see for example Benartzi and Thaler (1995), Lopes and Oden (1999), Shefrin and Statman (2000), De Giorgi and Post (2008), and He and Zhou (2009c). Little analytical treatment has been carried out for dynamic, especially continuous-time, asset allocation featuring behavioural criteria.…”

Section: Introductionmentioning

confidence: 99%

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Behavioral portfolio selection with loss control

Zhang

Jin

Zhou

2011

Acta. Math. Sin.-English Ser.

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In this paper we formulate a continuous-time behavioral (à la cumulative prospect theory) portfolio selection model where the losses are constrained by a pre-specified upper bound. Economically the model is motivated by the previously proved fact that the losses occurring in a bad state of the world can be catastrophic for an unconstrained model. Mathematically solving the model boils down to solving a concave Choquet minimization problem with an additional upper bound. We derive the optimal solution explicitly for such a loss control model. The optimal terminal wealth profile is in general characterized by three pieces: the agent has gains in the good states of the world, gets a moderate, endogenously constant loss in the intermediate states, and suffers the maximal loss (which is the given bound for losses) in the bad states. Examples are given to illustrate the general results.

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“…A portfolio selection model (without loss control) is therefore to solve the following optimization problem 4 Maximize V (X − B)…”

Section: Formulation Of the Modelmentioning

confidence: 99%

Section: Formulation Of the Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Behavioral portfolio selection with loss control

Zhang

Jin

Zhou

2011

Acta. Math. Sin.-English Ser.

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“…Though quite different in approach, our analysis is similar in spirit to the analysis of Gourieroux and Monfort (2005), who analyze statistical properties of efficient portfolios in a constrained parametric expected utility optimization setup. De Giorgi and Post (2004) use a general equilibrium framework to develop a mean-CRR CAPM assuming that all agents have mean-CRR preferences, while we only assume this for the investor under consideration. Moreover, De Giorgi and Post (2004) consider atomic probability distributions of asset returns, while we focus on non-atomic return distributions.…”

Section: Introductionmentioning

confidence: 99%

“…De Giorgi and Post (2004) use a general equilibrium framework to develop a mean-CRR CAPM assuming that all agents have mean-CRR preferences, while we only assume this for the investor under consideration. Moreover, De Giorgi and Post (2004) consider atomic probability distributions of asset returns, while we focus on non-atomic return distributions. The remainder of this paper is structured as follows.…”

Section: Introductionmentioning

confidence: 99%

Testing for Mean-Coherent Regular Risk Spanning

Melenberg

Polbennikov

2005

SSRN Journal

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Coherent risk measures have received considerable attention in the recent literature. Coherent regular risk measures form an important subclass: they are empirically identifiable, and, when combined with mean return, they are consistent with second order stochastic dominance. As a consequence, these risk measures are natural candidates in a mean-risk trade-off portfolio choice. In this paper we develop a mean-coherent regular risk spanning test and related performance measure. The test and the performance measure can be implemented by means of a simple semi-parametric instrumental variable regression, where instruments have a direct link with the stochastic discount factor. We illustrate applications of the spanning test and the performance measure for several coherent regular risk measures, including the well known expected shortfall.

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Competitive Equilibria With Distortion Risk Measures

Boonen

2015

ASTIN Bull.

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This paper studies optimal risk redistribution between firms, such as banks or insurance companies. The introduction of the Basel II regulation and the Swiss Solvency Test (SST) has increased the use of risk measures to evaluate financial or insurance risk. We consider the case where firms use a distortion risk measure (also called dual utility) to evaluate risk. The paper first characterizes all Pareto optimal redistributions. Thereafter, it characterizes all competitive equilibria. It presents three conditions that are jointly sufficient for existence of a unique equilibrium redistribution. This equilibrium's redistribution and prices are provided in closed form via a representative agent.JEL classification: D53, D81, G11, G22.

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Second Order Stochastic Dominance, Reward-Risk Portfolio Selection and the CAPM

Cited by 23 publications

References 43 publications

Behavioral portfolio selection with loss control

Behavioral portfolio selection with loss control

Testing for Mean-Coherent Regular Risk Spanning

Competitive Equilibria With Distortion Risk Measures

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