Worst-case optimal investment with a random number of crashes

Christoph Belak, Sören Christensen and Olaf Menkens

Statistics & Probability Letters, 2014, vol. 90, issue C, 140-148

Abstract: We study a portfolio optimization problem in a market which is under the threat of crashes. At random times, the investor receives a warning that a crash in the risky asset might occur. We construct a strategy which renders the investor indifferent about an immediate crash of maximum size and no crash at all. We then verify that this strategy outperforms every other trading strategy using a direct comparison approach. We conclude with numerical examples and calculating the costs of hedging against crashes.

Keywords: Optimal investment; Market crashes; Worst-case scenario; Financial bubbles (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.spl.2014.03.021

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