Dynamic portfolio allocation, the dual theory of choice and probability distortion functions

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dc.contributor.authorHamada, Mahmouden
dc.contributor.authorSherris, Michaelen
dc.contributor.authorvan der Hoek, Johnen
dc.contributor.schoolSchool of Mathematical Sciences : Applied Mathematicsen
dc.date.issued2006en
dc.description.abstractStandard optimal portfolio choice models assume that investors maximize 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 optimization 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 probability distortion operator based on the cumulative normal distribution function. Both risk measures rank-order prospects and apply a distortion function to the entire vector of probabilities.en
dc.description.statementofresponsibilityMahmoud Hamada, Michael Sherris and John van der Hoeken
dc.identifier.citationASTIN Bulletin, 2006; 36(1): 187-217en
dc.identifier.doi10.2143/AST.36.1.2014149en
dc.identifier.urihttp://hdl.handle.net/2440/23825
dc.language.isoenen
dc.publisherPeetersen
dc.rights© 2006 by Astin Bulletinen
dc.source.urihttp://poj.peeters-leuven.be/content.php?url=article&id=2014149en
dc.subjectPortfolio allocation, dual theory, probability distortion, equilibrium pricingen
dc.titleDynamic portfolio allocation, the dual theory of choice and probability distortion functionsen
dc.typeJournal articleen

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