Related papers: Loss Aversion and State-Dependent Linear Utility F…
We study a continuous-time portfolio choice problem for an investor whose state-dependent preferences are determined by an exogenous factor that evolves as an It\^o diffusion process. Since risk attitudes at the end of the investment…
The main purpose of this work is to derive a partial differential equation for the reserves of life insurance liabilities subject to stochastic interest rates where the benefits and premiums depend directly on changes in the interest rate…
We study investment and insurance demand decisions for an agent in a theoretical continuous-time expected utility maximization model that combines risky assets with an (exogenous) insurable background risk. This risk takes the form of a…
Multivariate probability density functions of returns are constructed in order to model the empirical behavior of returns in a financial time series. They describe the well-established deviations from the Gaussian random walk, such as an…
The most commonly accepted model for investors' preferences is expected utility theory. More recently, other theories have emerged and pose new challenges to mathematics. The present paper treats preferences of cumulative prospect theory…
We implement nonparametric revealed-preference tests of subjective expected utility theory and its generalizations. We find that a majority of subjects' choices are consistent with the maximization of some utility function. They respond to…
The notion of utility maximising entropy (u-entropy) of a probability density, which was introduced and studied by Slomczynski and Zastawniak (Ann. Prob 32 (2004) 2261-2285, arXiv:math.PR/0410115 v1), is extended in two directions. First,…
This paper establishes the first analytical relationship between predictive model performance and loss ratio in insurance pricing. We derive a closed-form formula connecting the Pearson correlation between predicted and actual losses to…
An analytical solution to single-horizon asset allocation for an investor with a piecewise-linear utility function, called herein the "budget threshold utility," and exogenous position limits is presented. The resulting functional form has…
We analyze the potential of reinsurance for reversing the current trend of decreasing capital guarantees in life insurance products. Providing an insurer with an opportunity to shift part of the financial risk to a reinsurer, we solve the…
We consider an agent interacting with an unknown environment. The environment is a function which maps natural numbers to natural numbers; the agent's set of hypotheses about the environment contains all such functions which are computable…
This paper examines optimal risk sharing for empirically realistic risk attitudes, providing results on Pareto optimality, competitive equilibria, utility frontiers, and the first and second theorems of welfare. Contrary to common…
In this paper we study a robust expected utility maximization problem with random endowment in discrete time. We give conditions under which an optimal strategy exists and derive a dual representation for the optimal utility. Our approach…
A model for decision making that generalizes Expected Utility Maximization is presented. This model, Expected Qualitative Utility Maximization, encompasses the Maximin criterion. It relaxes both the Independence and the Continuity…
We introduce a new interpretation of two related notions - conditional utility and utility independence. Unlike the traditional interpretation, the new interpretation renders the notions the direct analogues of their probabilistic…
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…
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…
This paper describes a general approach for stochastic modeling of assets returns and liability cash-flows of a typical pensions insurer. On the asset side, we model the investment returns on equities and various classes of fixed-income…
Classical mean-variance portfolio theory tells us how to construct a portfolio of assets which has the greatest expected return for a given level of return volatility. Utility theory then allows an investor to choose the point along this…
Voluntary insurance contracts constitute a puzzle because they increase the expectation value of one party's wealth, whereas both parties must sign for such contracts to exist. Classically, the puzzle is resolved by introducing non-linear…