Martingale methods in dynamic portfolio allocation with distortion operators
Date
2001
Authors
Hamada, Mahmoud
Sherris, Michael
van der Hoek, John
Editors
Advisors
Journal Title
Journal ISSN
Volume Title
Type:
Conference paper
Citation
Proceedings of the 2001 Quantitative Methods in Finance Conference : pp.www1-www35.
Statement of Responsibility
Mahmoud Hamada, Michael Sherris & John van der Hoek
Conference Name
Quantitative Methods in Finance Conference (2001 : Sydney, Australia)
Abstract
Standard optimal portfolio choice models assume that investors maximise the expected
utility of their future outcomes. However, behaviour which is inconsistent with the expected
utility theory has often been observed.
In a discrete time setting, we provide a formal treatment of risk measures based on distortion
functions that are consistent with Yaari’s dual (non-expected utility) theory of choice
(1987), and set out a general layout for portfolio optimisation in this non-expected utility
framework using the risk neutral computational approach.
As an application, we consider two particular risk measures. The first one is based on
the PH-transform and treats the upside and downside of the risk differently. The second
one, introduced by Wang (2000) uses a distortion operator based on the cumulative normal
distribution function.
School/Discipline
School of Mathematical Sciences : Applied Mathematics