Dynamic portfolio allocation, the dual theory of choice and probability distortion functions
Standard optimal portfolio choice models assume that investors maximise theexpected utility of their future outcomes. However, behaviour which is inconsistentwith the expected utility theory has often been observed.In a discrete time setting, we provide a formal treatment of risk measuresbased on distortion functions that are consistent with Yaari's dual (non-expectedutility) theory of choice (1987)and set out a general layout for portfolio optimisationin this non-expected utility framework using the risk neutral Computationalapproach.As an application, we consider two particular risk measures. The first oneis based on the PH-transform and treats the upside and downside of the riskdifferently. The second one, introduced by Wang (2000) uses a probability distortionoperator based on the cumulative normal distribution function. Bothrisk measures rank-order prospects and apply a distortion function to the entirevector of probabilities.
Year of publication: |
2006
|
---|---|
Authors: | Hamada Mahmoud ; Sherris Michael ; Van Der Hoek John |
Publisher: |
Peeters Publishing |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility
N, Njenga Carolyn, (2011)
-
Financial Innovation and the Hedging of Longevity Risk
Michael, Sherris, (2008)
- More ...