Mean-risk portfolio management with bankruptcy prohibition

K.C. Wong, S.C.P. Yam and J. Zeng

Insurance: Mathematics and Economics, 2019, vol. 85, issue C, 153-172

Abstract: In accordance with Solvency II, the commonly tightened government regulation on insurance cooperations, they have been obligated to take conservative investment strategies such as those ruling out the possibility of bankruptcy. With this in mind, in this article, we aim to continue our work (Wong et al., 2017a,b) . First, we study the solvability of mean-risk portfolio optimization problem with bankruptcy prohibition, in the complete market in which the investor aims to maximize the expected payoff and to minimize the deviation risk simultaneously, which is of great use in the insurance paradigm. Secondly, we also provide the original weak convergence result of the optimal terminal wealth of a sequence of approximate markets to that of the limiting market through their corresponding pricing kernels. As a result, we establish an effective numerical algorithm calibrating the optimal terminal wealth under Black–Scholes models by that of binomial tree models. The results of our numerical simulations indicate that the downside risk of the optimal payoff can be effectively reduced by imposing the bankruptcy prohibition.

Keywords: Mean-risk portfolio selection; Deviation risk; Bankruptcy prohibition; Nonlinear moment problem; Weak convergence (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:85:y:2019:i:c:p:153-172

DOI: 10.1016/j.insmatheco.2019.01.005

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