Optimal portfolios under worst-case scenarios

Carole Bernard, Jit Seng Chen and Steven Vanduffel ()

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: In standard portfolio theories such as Mean-Variance optimization, expected utility theory, rank dependent utility heory, Yaari's dual theory and cumulative prospect theory, the worst outcomes for optimal strategies occur when the market declines (e.g. during crises), which is at odds with the needs of many investors. Hence, we depart from the traditional settings and study optimal strategies for investors who impose additional constraints on their final wealth in the states corresponding to a stressed financial market. We provide a framework that maintains the stylized features of the SP/A theory while dealing with the goal of security in a more flexible way. Preferences become state-dependent, and we assess the impact of these preferences on trading decisions. We construct optimal strategies explicitly and show how they outperform traditional diversified strategies under worst-case scenarios. © 2014 Copyright Taylor & Francis Group, LLC.

Keywords: Behavioural portfolio selection; Cost-efficiency; Growth optimal portfolio; Path-dependent strategies; Risk diversification; State-dependent preferences (search for similar items in EconPapers)
Date: 2014
Note: SCOPUS: ar.j
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Published in: Quantitative finance (2014) v.14 n° 4,p.657-671

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Optimal portfolios under worst-case scenarios (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ulb:ulbeco:2013/257677

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... lb.ac.be:2013/257677

Access Statistics for this paper

More papers in ULB Institutional Repository from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().