Dynamic Option-Based Strategies under Downside Loss Averse Preferences

Amine Jalal
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Amine Jalal: Goldman Sachs International

No 07-34, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In this paper, dynamic option-based investment strategies are derived and illustrated for investors exhibiting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock

Keywords: Asset allocation; Downside risk; Stochastic volatility; jumps. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-09
New Economics Papers: this item is included in nep-fmk and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0734

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