Dynamic mean-risk portfolio selection with multiple risk measures in continuous-time

Jianjun Gao, Yan Xiong and Duan Li

European Journal of Operational Research, 2016, vol. 249, issue 2, 647-656

Abstract: While our society began to recognize the importance to balance the risk performance under different risk measures, the existing literature has confined its research work only under a static mean-risk framework. This paper represents the first attempt to incorporate multiple risk measures into dynamic portfolio selection. More specifically, we investigate the dynamic mean-variance-CVaR (Conditional value at Risk) formulation and the dynamic mean-variance-SFP (Safety-First Principle) formulation in a continuous-time setting, and derive the analytical solutions for both problems. Combining a downside risk measure with the variance (the second order central moment) in a dynamic mean-risk portfolio selection model helps investors control both a symmetric central risk measure and an asymmetric catastrophic downside risk. We find that the optimal portfolio policy derived from our mean-multiple risk portfolio optimization models exhibits a feature of curved V-shape. Our numerical experiments using real market data clearly demonstrate a dominance relationship of our dynamic mean-multiple risk portfolio policies over the static buy-and-hold portfolio policy.

Keywords: Dynamic mean-risk portfolio selection; Conditional value at risk; Safety-first principle; Stochastic optimization; Martingale approach (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:249:y:2016:i:2:p:647-656

DOI: 10.1016/j.ejor.2015.09.005

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