Intertemporal Surplus Management with Jump Risks

Mareen Benk
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Mareen Benk: Department of Finance, WHU — Otto-Beisheim School of Management, D-56179 Vallendar, Germany

Chapter 4 in Stochastic Programming:Applications in Finance, Energy, Planning and Logistics, 2013, pp 69-95 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractI have developed an intertemporal portfolio choice model with jump risks. It can be applied to pension and life insurance funds, and private investors. Following the model of Rudolf and Ziemba (2004), these long-term investors aspire to “maximize the intertemporal expected utility of the surplus”, which is defined as “assets net of liabilities”. Return on liabilities are modelled by a typical pure-diffusion process. Return on assets are assumed to follow a jump-diffusion process with two jump components. More specifically, the first jump component represents a systemic risk according to Das and Uppal (2004) and the second jump component represents an idiosyncratic risk according to Jarrow and Rosenfeld (1984). An investor's optimal portfolio consists of three funds: a market portfolio, a liability-hedging portfolio, and a riskless asset. In contrast to the results of Rudolf and Ziemba (2004), a market portfolio not only hedges diffusion risk, but it also hedges systemic risk and it takes into account idiosyncratic jump risk so that the investor is additionally protected against both a systemic risk and an idiosyncratic jump risk.

Keywords: Stochastic Programming; Optimization with Scenarios; Finance; Energy; Production and Logistics Applications (search for similar items in EconPapers)
Date: 2013
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