Behavioral mean-risk portfolio selection in continuous time via quantile

Junna Bi and Danping Li

Communications in Statistics - Theory and Methods, 2023, vol. 52, issue 14, 4904-4933

Abstract: A behavioral mean-risk portfolio selection problem in continuous time is formulated and studied in this article. Based on the standard mean-variance portfolio selection problem, the cumulative distribution function of the cash flow is distorted by a probability distortion function. This probability distortion function represents the risk preference in a different way. Then the problem is no longer a convex optimization problem. This feature distinguishes it from the conventional linear-quadratic (LQ) problems. The stochastic optimal LQ control theory no longer applies. We take the quantile function of the terminal cash flow as the decision variable. The corresponding optimal terminal cash flow can be recovered by the optimal quantile function. Then the efficient strategy is the hedging strategy of the optimal terminal cash flow.

Date: 2023
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DOI: 10.1080/03610926.2021.1990955

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