Optimal Dynamic Portfolio Selection with Earnings-at-Risk

Z. F. Li (), H. Yang and X. T. Deng
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Z. F. Li: Sun Yat-Sen University
H. Yang: The University of Hong Kong
X. T. Deng: City University of Hong Kong

Journal of Optimization Theory and Applications, 2007, vol. 132, issue 3, No 7, 459-473

Abstract: Abstract In this paper we investigate a continuous-time portfolio selection problem. Instead of using the classical variance as usual, we use earnings-at-risk (EaR) of terminal wealth as a measure of risk. In the settings of Black-Scholes type financial markets and constantly-rebalanced portfolio (CRP) investment strategies, we obtain closed-form expressions for the best CRP investment strategy and the efficient frontier of the mean-EaR problem, and compare our mean-EaR analysis to the classical mean-variance analysis and to the mean-CaR (capital-at-risk) analysis. We also examine some economic implications arising from using the mean-EaR model.

Keywords: Dynamic portfolio optimization; Earnings-at-risk; Constantly-rebalanced portfolios; Black-scholes financial market (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/s10957-007-9184-2

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