Related papers: Risk, utility and sensitivity to large losses
We revisit the problem of portfolio selection, where an investor maximizes utility subject to a risk constraint. Our framework is very general and accommodates a wide range of utility and risk functionals, including non-concave utilities…
We propose a new class of monetary risk measures for assessing financial and ESG risk. The construction is based on classical shortfall risk measures with loss function replaced by a multi-attribute utility function. We present an extensive…
We study the sensitivity of the expected utility maximization problem in a continuous semi-martingale market with respect to small changes in the market price of risk. Assuming that the preferences of a rational economic agent are modeled…
Probabilistic risk aversion, defined through quasi-convexity in probabilistic mixtures, is a common useful property in decision analysis. We study a general class of non-monotone mappings, called the generalized rank-dependent functions,…
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,…
In the general framework of a semimartingale financial model and a utility function $U$ defined on the positive real line, we compute the first-order expansion of marginal utility-based prices with respect to a ``small'' number of random…
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…
It is well known that Expected Shortfall (also called Average Value-at-Risk) is a convex risk measure, i. e. Expected Shortfall of a convex linear combination of arbitrary risk positions is not greater than a convex linear combination with…
Previous literature shows that prevalent risk measures such as Value at Risk or Expected Shortfall are ineffective to curb excessive risk-taking by a tail-risk-seeking trader with S-shaped utility function in the context of portfolio…
The ongoing concern about systemic risk since the outburst of the global financial crisis has highlighted the need for risk measures at the level of sets of interconnected financial components, such as portfolios, institutions or members of…
Risk measures for multivariate financial positions are studied in a utility-based framework. Under a certain incomplete preference relation, shortfall and divergence risk measures are defined as the optimal values of specific set…
The aim of this study is to present proofs for new theorems. Basic thoughts of new definitions emerge from the decision-making under uncertainty in economics and finance. Shape of the certain utility curve is central to standard definitions…
In the prospect theory, value function is typically concave for gains, commonly convex for losses, with losses usually having a steeper slope than gains. The neural system largely differs from the loss and gains sides. Five new studies on…
Modern portfolio theory(MPT) addresses the problem of determining the optimum allocation of investment resources among a set of candidate assets. In the original mean-variance approach of Markowitz, volatility is taken as a proxy for risk,…
Approximations to utility indifference prices are provided for a contingent claim in the large position size limit. Results are valid for general utility functions on the real line and semi-martingale models. It is shown that as the…
Uncertainty is prevalent in engineering design, data-driven problems, and decision making broadly. Due to inherent risk-averseness and ambiguity about assumptions, it is common to address uncertainty by formulating and solving conservative…
Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their risk-aversion functions. To date there has been very little guidance on the choice of risk-aversion functions underlying…
The risk of financial positions is measured by the minimum amount of capital to raise and invest in eligible portfolios of traded assets in order to meet a prescribed acceptability constraint. We investigate nondegeneracy, finiteness and…
Most people are risk-averse (risk-seeking) when they expect to gain (lose). Based on a generalization of ``expected utility theory'' which takes this into account, we introduce an automaton mimicking the dynamics of economic operations.…
A risk analyst assesses potential financial losses based on multiple sources of information. Often, the assessment does not only depend on the specification of the loss random variable but also various economic scenarios. Motivated by this…