Optimal Portfolio Choice for a Behavioural Investor in Continuous-Time Markets

Miklos Rasonyi and Andrea M. Rodrigues

Papers from arXiv.org

Abstract: The aim of this work consists in the study of the optimal investment strategy for a behavioural investor, whose preference towards risk is described by both a probability distortion and an S-shaped utility function. Within a continuous-time financial market framework and assuming that asset prices are modelled by semimartingales, we derive sufficient and necessary conditions for the well-posedness of the optimisation problem in the case of piecewise-power probability distortion and utility functions. Finally, under straightforwardly verifiable conditions, we further demonstrate the existence of an optimal strategy.

New Economics Papers: this item is included in nep-cwa and nep-mac
Date: 2012-02, Revised 2013-04
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