Optimal portfolios under worst-case scenarios
Jit Seng Chen and
Steven Vanduffel ()
ULB Institutional Repository from ULB -- Universite Libre de Bruxelles
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)
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Published in: Quantitative finance (2014) v.14 nÂ° 4,p.657-671
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Journal Article: Optimal portfolios under worst-case scenarios (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ulb:ulbeco:2013/257677
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