Portfolio Optimization with Optimal Expected Utility Risk Measures

H. Fink, S. Geissel, J. Herbinger and F. T. Seifried

No 2019-07, Working Paper Series from University of Trier, Research Group Quantitative Finance and Risk Analysis

Abstract: The purpose of this article is to evaluate optimal expected utility risk measures (OEU) in a risk-constrained portfolio optimization context where the expected portfolio return is maximized. Wecompare the portfolio optimization with OEU constraint to a portfolio selection model using valueat risk as constraint. The former is a coherent risk measure for utility functions with constantrelative risk aversion and allows individual specifications to the investor’s risk attitude and timepreference. In a case study with three indices we investigate how these theoretical differences in-fluence the performance of the portfolio selection strategies. A copula approach with univariateARMA-GARCH models is used in a rolling forecast to simulate monthly future returns and cal-culate the derived measures for the optimization. The results of this study illustrate that bothoptimization strategies perform considerably better than an equally weighted portfolio and a buyand hold portfolio. Moreover, our results illustrate that portfolio optimization with OEU con-straint experiences individualized effects, e.g. less risk averse investors lose more portfolio value inthe financial crises but outperform their more risk averse counterparts in bull markets.

Keywords: optimal expected utility; portfolio optimization; risk measures; value at risk (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2019
New Economics Papers: this item is included in nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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