Portfolio Optimization with Nonlinear Loss Aversion and Transaction Costs

Alessandro Avellone (), Anna Maria Fiori () and Ilaria Foroni ()
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Alessandro Avellone: University of Milano-Bicocca
Anna Maria Fiori: University of Milano-Bicocca
Ilaria Foroni: University of Milano-Bicocca

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2021, pp 51-56 from Springer

Abstract: Abstract This proposal puts forth a methodology that can be used to derive optimal asset allocations for general forms of Loss Aversion, explicitly accounting for the real risks associated with large-scale investments. The portfolio problem is solved by a stochastic algorithm based on Particle Swarm Optimization, which permits the inclusion of transaction costs and other constraints faced by investors and fund managers. An empirical study compares the proposed approach to traditional strategies in terms of portfolio composition, downside protection in adverse market conditions and global performance.

Keywords: Asset allocation; Downside risk; Particle swarm optimization; Cumulative prospect theory (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-78965-7_9

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DOI: 10.1007/978-3-030-78965-7_9

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