Related papers: Rationalizing Investors Choice
Consider an investor trading dynamically to maximize expected utility from terminal wealth. Our aim is to study the dependence between her risk aversion and the distribution of the optimal terminal payoff. Economic intuition suggests that…
This paper studies a continuous-time portfolio selection problem under a general distribution of random risk aversion (RRA). We provide a complete characterization of all deterministic equilibrium strategies in closed form. Our results show…
We derive a closed-form expression capturing the degree of Relative Risk Aversion (RRA) of investors for non-"fair" lotteries. We argue that our formula is superior to earlier methods that have been proposed, as it is a function of only…
Diversification is the typical investment strategy of risk-averse agents. However, non-diversified positions that allocate all resources to a single asset, state of the world or revenue stream are common too. We show that whenever finitely…
In this paper, we explore the portfolio allocation problem involving an uncertain covariance matrix. We calculate the expected value of the Constant Absolute Risk Aversion (CARA) utility function, marginalized over a distribution of…
CRRA utility where the risk aversion coefficient is a constant is commonly seen in various economics models. But wealth-driven risk aversion rarely shows up in investor's investment problems. This paper mainly focus on numerical solutions…
We consider the economic problem of optimal consumption and investment with power utility. We study the optimal strategy as the relative risk aversion tends to infinity or to one. The convergence of the optimal consumption is obtained for…
We pursue an inverse approach to utility theory and consumption & investment problems. Instead of specifying an agent's utility function and deriving her actions, we assume we observe her actions (i.e. her consumption and investment…
We propose a general family of piecewise hyperbolic absolute risk aversion (PHARA) utilities, including many classic and non-standard utilities as examples. A typical application is the composition of a HARA preference and a piecewise…
Under mean-variance-utility framework, we propose a new portfolio selection model, which allows wealth and time both have influences on risk aversion in the process of investment. We solved the model under a game theoretic framework and…
This paper studies the problem of optimal investment with CRRA (constant, relative risk aversion) preferences, subject to dynamic risk constraints on trading strategies. The market model considered is continuous in time and incomplete. the…
We consider an arbitrage-free, discrete time and frictionless market. We prove that an investor maximising the expected utility of her terminal wealth can always find an optimal investment strategy provided that her dissatisfaction of…
In this article we solve the problem of maximizing the expected utility of future consumption and terminal wealth to determine the optimal pension or life-cycle fund strategy for a cohort of pension fund investors. The setup is strongly…
This paper discusses an alternative explanation for the empirical findings contradicting the positive relationship between risk (variance) and reward (expected return). We show that these contradicting results might be due to the false…
We consider an investor who wants to select her/his optimal consumption, investment and insurance policies. Motivated by new insurance products, we allow not only the financial marke but also the insurable loss to depend on the regime of…
We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in a classic expected return maximization problem. For what we call the infimum of expectations class of risk measures, we show…
We adress the maximization problem of expected utility from terminal wealth. The special feature of this paper is that we consider a financial market where the price process of risky assets can have a default time. Using dynamic…
In an arbitrage-free simple market, we demonstrate that for a class of state-dependent exponential utilities, there exists a unique prediction of the random risk aversion that ensures the consistency of optimal strategies across any time…
This paper considers the optimal portfolio selection problem in a dynamic multi-period stochastic framework with regime switching. The risk preferences are of exponential (CARA) type with an absolute coefficient of risk aversion which…
We present a theory of expected utility with state-dependent linear utility functions for monetary returns, that incorporates the possibility of loss-aversion. Our results relate to first order stochastic dominance, mean-preserving spread,…