Related papers: Rationalizing Investors Choice
This paper studies the problem of maximizing expected utility from terminal wealth in a semi-static market composed of derivative securities, which we assume can be traded only at time zero, and of stocks, which can be traded continuously…
For an exponential utility maximizing investment strategy in a Black-Scholes Setting, fixed upper and lower constraints are introduced on the terminal wealth. This is equivalent to combining the optimal strategy with options. The resulting…
In our previous paper, "A Unified Approach to Systemic Risk Measures via Acceptance Set" (\textit{Mathematical Finance, 2018}), we have introduced a general class of systemic risk measures that allow for random allocations to individual…
In this paper, we study an intertemporal utility maximization problem in which an investor chooses consumption and portfolio strategies in the presence of a stochastic factor and a no-borrowing constraint. In the spirit of the Kim-Omberg…
The classical Merton investment problem predicts deterministic, state-dependent portfolio rules; however, laboratory and field evidence suggests that individuals often prefer randomized decisions leading to stochastic and noisy choices.…
Any firm whose business strategy has an exposure constraint that limits its potential gain naturally considers expansion, as this can increase its exposure. We model business expansion as an enlargement of the opportunity set for business…
In this paper, we consider the problem of optimal investment by an insurer. The insurer invests in a market consisting of a bank account and $m$ risky assets. The mean returns and volatilities of the risky assets depend nonlinearly on…
We analyze characteristics' joint predictive information through the lens of out-of-sample power utility functions. Linking weights to characteristics to form optimal portfolios suffers from estimation error which we mitigate by maximizing…
It is widely claimed in investment education and practice that extending the investment horizon reduces risk, and that diversifying investment timing, for example through dollar-cost averaging (DCA), further mitigates investment risk.…
This paper studies stability of the exponential utility maximization when there are small variations on agent's utility function. Two settings are considered. First, in a general semimartingale model where random endowments are present, a…
The von Neumann and Morgenstern theory postulates that rational choice under uncertainty is equivalent to maximization of expected utility (EU). This view is mathematically appealing and natural because of the affine structure of the space…
Portfolio selection problems that optimize expected utility are usually difficult to solve. If the number of assets in the portfolio is large, such expected utility maximization problems become even harder to solve numerically. Therefore,…
We study portfolio selection in a complete continuous-time market where the preference is dictated by the rank-dependent utility. As such a model is inherently time inconsistent due to the underlying probability weighting, we study the…
An agent choosing between various actions tends to take the one with the lowest cost. But this choice is arguably too rigid (not adaptive) to be useful in complex situations, e.g., where exploration-exploitation trade-off is relevant in…
We consider the terminal wealth utility maximization problem from the point of view of a portfolio manager who is paid by an incentive scheme, which is given as a convex function $g$ of the terminal wealth. The manager's own utility…
A perfectly rational decision-maker chooses the best action with the highest utility gain from a set of possible actions. The optimality principles that describe such decision processes do not take into account the computational costs of…
This paper presents an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. We solve the problem in continuous time, for an investor with a…
In this paper, we consider the revealed preferences problem from a learning perspective. Every day, a price vector and a budget is drawn from an unknown distribution, and a rational agent buys his most preferred bundle according to some…
In a continuous time stochastic economy, this paper considers the problem of consumption and investment in a financial market in which the representative investor exhibits a change in the discount rate. The investment opportunities are a…
The principle that rational agents should maximize expected utility or choiceworthiness is intuitively plausible in many ordinary cases of decision-making under uncertainty. But it is less plausible in cases of extreme, low-probability risk…