SSRN Author: Moris Simon StrubMoris Simon Strub SSRN Content
https://privwww.ssrn.com/author=2759311
https://privwww.ssrn.com/rss/en-usSun, 03 Jan 2021 01:00:17 GMTeditor@ssrn.com (Editor)Sun, 03 Jan 2021 01:00:17 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: Forward Rank-Dependent Performance Criteria: Time-Consistent Investment Under Probability DistortionWe introduce the concept of forward rank-dependent performance criteria, extending the original notion to forward criteria that incorporate probability distortions. A fundamental challenge is how to reconcile the time-consistent nature of forward performance criteria with the time-inconsistency stemming from probability distortions. For this, we first propose two distinct definitions, one based on the preservation of performance value and the other on the time-consistency of policies and, in turn, establish their equivalence. We then fully characterize the viable class of probability distortion processes and provide the following dichotomy: it is either the case that the probability distortions are degenerate in the sense that the investor would never invest in the risky assets, or the marginal probability distortion equals to a normalized power of the quantile function of the pricing kernel. We also characterize the optimal wealth process, whose structure motivates the ...
https://privwww.ssrn.com/abstract=3364750
https://privwww.ssrn.com/1976495.htmlSat, 02 Jan 2021 10:37:52 GMTREVISION: Portfolio Selection With Exploration of New Investment OpportunitiesWe introduce a model for portfolio selection with an extendable investment universe where the agent faces a trade-off between exploiting existing and exploring for new investment opportunities. An agent with mean-variance preferences starts with an existing investment universe consisting of a risk-free and a number of risky assets. However, rather than being limited to these assets, the agent has the option to devote a part of his/her wealth for exploring new investment opportunities. If this option is exercised, a new risky asset is discovered and the agent subsequently invests in the extended universe. We show that the problem is well-posed when the Sharpe ratio of the newly discovered asset has reasonably asymptotic elasticity, and determine an equation characterizing the optimal amount devoted to exploration. We determine that incremental exploration does not pay off: one must put a significant amount at risk in order to harvest the potential benefits of exploring for new ...
https://privwww.ssrn.com/abstract=3625492
https://privwww.ssrn.com/1930067.htmlMon, 10 Aug 2020 11:07:20 GMTREVISION: Portfolio Selection With Exploration of New Investment OpportunitiesWe introduce a model for portfolio selection with an extendable investment universe where the agent faces a trade-off between exploiting existing and exploring for new investment opportunities. An agent with mean-variance preferences starts with an existing investment universe consisting of a risk-free and a number of risky assets. However, rather than being limited to these assets, the agent has the option to devote a part of his/her wealth for exploring new investment opportunities. If this option is exercised, a new risky asset is discovered and the agent subsequently invests in the extended universe. We show that the problem is well-posed when the Sharpe ratio of the newly discovered asset has reasonably asymptotic elasticity, and determine an equation characterizing the optimal amount devoted to exploration. We determine that incremental exploration does not pay off: one must put a significant amount at risk in order to harvest the potential benefits of exploring for new ...
https://privwww.ssrn.com/abstract=3625492
https://privwww.ssrn.com/1918061.htmlTue, 07 Jul 2020 16:33:40 GMTREVISION: How Endogenization of the Reference Point Affects Loss Aversion: A Study of Portfolio SelectionWe study the implications of various models of reference point formation on optimal decision making in the context of portfolio optimization under loss aversion. If the reference point is exogenously given, then the predictions of any such model crucially depend on the choice of the reference point. On the other hand, if the reference point were fully endogenously determined, then loss aversion would not affect choice behavior, which is in violation of the empirical evidence. We thus 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 reference point formation: A model of a mentally ...
https://privwww.ssrn.com/abstract=3318295
https://privwww.ssrn.com/1906623.htmlTue, 09 Jun 2020 08:40:28 GMTREVISION: Evolution of the Arrow-Pratt Measure of Risk-Tolerance for Predictable Forward Utility ProcessesWe study the evolution of the Arrow-Pratt measure of risk-tolerance in the framework of discrete-time predictable forward utility (or performance) processes. An agent starts with an initial utility function, which is then sequentially updated forward in time under the guidance of the martingale optimality principle. We first characterize completely the class of forward utility functions that have a time-constant measure of risk-tolerance and thus a preservation of preferences. We then show that, in general, preferences vary over time and whether the agent becomes more or less tolerant to risk is related to the curvature of the measure of risk-tolerance. An example where the initial utility function belongs to the SAHARA class, which is found to be analytically tractable and stable in the sense that all the subsequent utility functions belong to the same class as the initial one, illustrates the obtained results.
https://privwww.ssrn.com/abstract=3276638
https://privwww.ssrn.com/1906622.htmlTue, 09 Jun 2020 08:39:54 GMTREVISION: An Enhanced Mean-Variance Framework for Robo-Advising ApplicationsAny robo-advisor needs to decide on a framework to model the preferences of its investors over uncertain outcomes. As of today, most robo-advisors model their investors as mean-variance optimizers. While the mean-variance framework is intuitive and optimal investment strategies have been derived in various settings, it suffers from serious drawbacks due to its time-inconsistency and non-monotonicity. We propose an enhanced mean-variance framework for robo-advising applications which is based on the equivalence between the mean-variance objective and quadratic utility functions. By introducing a flexible weight on the decreasing part of the quadratic utility function, we can alleviate the issues of time-inconsistency and non-monotonicity while keeping the features leading to the popularity of the mean-variance framework. We show how the new framework can be calibrated by means of questionnaires and discuss the advantages of the novel framework in terms of the resulting terminal wealth ...
https://privwww.ssrn.com/abstract=3302111
https://privwww.ssrn.com/1895557.htmlMon, 11 May 2020 09:58:58 GMTREVISION: Risk and Potential: A Perspective from Mean-Variance Induced Utility FunctionsWe introduce a family of mean-variance induced utility functions which keep two of the main features leading to the popularity of the mean-variance framework: the intuitive interpretation of the objective and the availability of an easily computable optimal investment strategy. The utility functions are motivated by the equivalence between the mean-variance objective and a quadratic utility function and parametrized by a target wealth, a potential-aversion parameter and a weighting parameter. Taking the perspective of mean-variance induced utility functions naturally leads to the two new measures, risk - the average weighted outcomes below the target wealth, and potential - the average weighted outcomes above the target wealth. We establish a semi-analytical solution for the optimal trading strategy under this novel framework and provide numerical examples showing that lowering the potential-aversion leads to better investment performance in terms of both risk and potential.<br>
https://privwww.ssrn.com/abstract=3302111
https://privwww.ssrn.com/1889392.htmlFri, 24 Apr 2020 09:09:29 GMTREVISION: Forward Rank-Dependent Performance Criteria: Time-Consistent Investment Under Probability DistortionWe introduce the concept of forward rank-dependent performance criteria, extending the original notion to forward criteria that incorporate probability distortions. A fundamental challenge is how to reconcile the time-consistent nature of forward performance criteria with the time-inconsistency stemming from probability distortions. For this, we first propose two distinct definitions, one based on the preservation of performance value and the other on the time-consistency of policies and, in turn, establish their equivalence. We then fully characterize the viable class of probability distortion processes and provide the following dichotomy: it is either the case that the probability distortions are degenerate in the sense that the investor would never invest in the risky assets, or the marginal probability distortion equals to a normalized power of the quantile function of the pricing kernel. We also characterize the optimal wealth process, whose structure motivates the ...
https://privwww.ssrn.com/abstract=3364750
https://privwww.ssrn.com/1875680.htmlSat, 14 Mar 2020 09:12:05 GMTNew: A Note on Monotone Mean-Variance Preferences for Continuous ProcessesWe extend a recent result of Trybula and Zawisza [Mathematics of Operations Research, 44(3), 966-987, 2019], who investigate a continuous-time portfolio optimization problem under monotone mean-variance preferences. Their main finding is that the optimal strategies for monotone and classical mean-variance preferences coincide in a stochastic factor model for the financial market. We generalize this result to any model for the financial market where stock prices are continuous.
https://privwww.ssrn.com/abstract=3508308
https://privwww.ssrn.com/1857468.htmlMon, 13 Jan 2020 20:21:12 GMT