 Optimal investment with S-shaped utility and trading and Value at Risk constraints: An application to defined contribution pension planYinghui Dong and Harry Zheng European Journal of Operational Research, 2020, vol. 281, issue 2, 341-356 Abstract: In this paper we investigate an optimal investment problem under loss aversion (S-shaped utility) and with trading and Value-at-Risk (VaR) constraints faced by a defined contribution (DC) pension fund manager. We apply the concavification and dual control method to solve the problem and derive the closed-form representation of the optimal terminal wealth in terms of a controlled dual state variable. We propose a simple and effective algorithm for computing the initial dual state value, the Lagrange multiplier and the optimal terminal wealth. Theoretical and numerical results show that the VaR constraint can significantly impact the distribution of the optimal terminal wealth and may greatly reduce the risk of losses in bad economic states due to loss aversion. Keywords: Control; S-shaped utility; Trading constraint; Value-at-Risk constraint; Defined contribution pension plan (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:281:y:2020:i:2:p:341-356 DOI: 10.1016/j.ejor.2019.08.034 Access Statistics for this article European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati More articles in European Journal of Operational Research from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.