MPS Risk Aversion and MV Analysis in Continuous Time with Lévy Jumps

Chenghu Ma

No 2013-10-14, Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Abstract: This paper studies sequential portfolio choices by MPS-risk-averse investors in a continuous time jump-diffusion framework. It is shown that the optimal trading strategies for MPS risk averse investors, if they exist, must be located on a so-called ‘temporal efficient frontier’ (t.e.f.). Analytic and qualitative characterizations of the t.e.f. are provided and are shown to form a hyperbola in the μ-σ plane. This paper also provides insights on (i) dynamic consistency underlying those temporal efficient trading strategies; (ii) mutual fund separation in extending the classical notion of Tobin (1958) and Black (1972) to this continuous-time setting; (iii) risk decomposition in presence of Lévy jumps, and (iv) differences between MPS risk averse investors

Date: 2013-10-14
New Economics Papers: this item is included in nep-upt
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