Portfolio choice with skewness preference and wealth-dependent risk aversion

Congming Mu, Weidong Tian and Jinqiang Yang

Quantitative Finance, 2019, vol. 19, issue 11, 1905-1919

Abstract: This paper studies a dynamic portfolio choice problem for an investor with both wealth-dependent risk aversion and wealth-dependent skewness preferences. In a general economic setting, the solution is characterized in terms of a system of extended Hamilton-Jacobi-Bellman (EHJB) equations and the solution is given in closed form in some special cases. We demonstrate the effects of higher order risk preferences and state-dependent risk aversion on the optimal asset allocation decisions. We find that wealth-dependent risk aversion facilitates risk taking and the skewness preference leads to a more positively skewed portfolio in certain circumstances.

Date: 2019
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DOI: 10.1080/14697688.2019.1592214

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