Recursive risk measures under regime switching applied to portfolio selection

Zhiping Chen, Jia Liu and Yongchang Hui

Quantitative Finance, 2017, vol. 17, issue 9, 1457-1476

Abstract: In this paper, we define the conditional risk measure under regime switching and derive a class of time consistent multi-period risk measures. To do so, we describe the information process with regime switching in a product space associated with the product of two filtrations. Moreover, we show how to establish the corresponding multi-stage portfolio selection models using the time consistent multi-period risk measure for medium-term or long-term investments. Take the conditional value-at-risk measure as an example, we demonstrate the resulting multi-stage portfolio selection problem can be transformed into a second-order cone programming problem. Finally, we carry out a series of empirical tests to illustrate the superior performance of the proposed random framework and the corresponding multi-stage portfolio selection model.

Date: 2017
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:17:y:2017:i:9:p:1457-1476

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DOI: 10.1080/14697688.2016.1267393

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