SSRN Author: Xue Dong HeXue Dong He SSRN Content
https://www.ssrn.com/author=1346556
https://www.ssrn.com/rss/en-usSun, 08 May 2022 01:03:53 GMTeditor@ssrn.com (Editor)Sun, 08 May 2022 01:03:53 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: How Endogenization of the Reference Point Affects Loss Aversion: A Study of Portfolio SelectionWe study the implications of various models of partially endogenous reference point formation on optimal decision making in the context of portfolio optimization under loss aversion. Specifically, we first consider the partially endogenous model of De Giorgi and Post [Management Science 57 (6):1094–1110, 2011], where the reference point is determined in equilibrium but contains an exogenous component. We find that optimal trading behavior is as if the reference point were completely exogenous and that allowing for a mental adjustment of the reference point solely manifests itself in a lower degree of loss aversion. We then propose two novel models of partially endogenous reference point formation: A model of a reference point determined by optimal expectations and a model of mental reference point updating. Our conclusions on the effect of a partially endogenized reference point on portfolio selection under loss aversion are also confirmed under these two models. These findings ...
https://www.ssrn.com/abstract=3318295
https://www.ssrn.com/2135644.htmlThu, 05 May 2022 14:07:26 GMTNew: Risk Measures: Robustness, Elicitability, and BacktestingRisk measures are used not only for financial institutions’ internal risk management but also for external regulation (e.g., in the Basel Accord for calculating the regulatory capital requirements for financial institutions). Though fundamental in risk management, how to select a good risk measure is a controversial issue. We review the literature on risk measures, particularly on issues such as subadditivity, robustness, elicitability, and backtesting. We also aim to clarify some misconceptions and confusions in the literature. In particular, we argue that, despite lacking some mathematical convenience, the median shortfall—that is, the median of the tail loss distribution—is a better option than the expected shortfall for setting the Basel Accords capital requirements due to statistical and economic considerations such as capturing tail risk, robustness, elicitability, backtesting, and surplus invariance.
https://www.ssrn.com/abstract=4065354
https://www.ssrn.com/2119296.htmlThu, 24 Mar 2022 09:17:12 GMTNew: Recursive Utility with Investment Gains and Losses: Existence, Uniqueness, and ConvergenceWe consider a generalization of the recursive utility model by adding a new component that represents utility of investment gains and losses. We also study the utility process in this generalized model with constant elasticity of intertemporal substitution and relative risk aversion degree, and with infinite time horizon. In a specific, finite-state Markovian setting, we prove that the utility process uniquely exists when the agent derives nonnegative gain-loss utility, and that it can be non-existent or non-unique otherwise. Moreover, we prove that the utility process, when it uniquely exists, can be computed by starting from any initial guess and applying the recursive equation that defines the utility process repeatedly. We then consider a portfolio selection problem with gain-loss utility and solve it by proving that the corresponding dynamic programming equation has a unique solution. Finally, we extend certain previous results to the case in which the state space is infinite.
https://www.ssrn.com/abstract=2790768
https://www.ssrn.com/2046468.htmlFri, 30 Jul 2021 11:00:39 GMTNew: Recursive Utility with Investment Gains and Losses: Existence, Uniqueness, and ConvergenceWe consider a generalization of the recursive utility model by adding a new component that represents utility of investment gains and losses. We also study the utility process in this generalized model with constant elasticity of intertemporal substitution and relative risk aversion degree, and with infinite time horizon. In a specific, finite-state Markovian setting, we prove that the utility process uniquely exists when the agent derives nonnegative gain-loss utility, and that it can be non-existent or non-unique otherwise. Moreover, we prove that the utility process, when it uniquely exists, can be computed by starting from any initial guess and applying the recursive equation that defines the utility process repeatedly. We then consider a portfolio selection problem with gain-loss utility and solve it by proving that the corresponding dynamic programming equation has a unique solution. Finally, we extend certain previous results to the case in which the state space is infinite.
https://www.ssrn.com/abstract=2790768
https://www.ssrn.com/2041574.htmlMon, 12 Jul 2021 10:47:06 GMTREVISION: On the Equilibrium Strategies for Time-Inconsistent Problems in Continuous TimeIn a continuous-time setting, the existing notion of equilibrium strategies for time-inconsistent problems in the literature, referred to as weak equilibrium, is not fully aligned with the standard definition of equilibrium in the game theory in that the agent may be willing to deviate from a given weak equilibrium strategy. To address this issue, Huang and Zhou (2019, forthcoming in Mathematics of Operations Research) propose the notion of strong equilibrium for an infinite-time stochastic control problem in which an agent can control the generator of a time-homogeneous, continuous-time, finite-state Markov chain at each time. We study weak and strong equilibrium in a general diffusion framework, provide necessary conditions for a strategy to be a strong equilibrium, and prove that strong equilibrium strategies do not exist for four investment and consumption problems. Finally, we propose a new notion of equilibrium strategies, referred to as regular equilibrium, show that it ...
https://www.ssrn.com/abstract=3308274
https://www.ssrn.com/2040473.htmlWed, 07 Jul 2021 09:36:13 GMT