scholarly journals Multi-Period Investment Strategies under Cumulative Prospect Theory

2019 ◽  
Vol 12 (2) ◽  
pp. 83 ◽  
Author(s):  
Liurui Deng ◽  
Traian A. Pirvu
Keyword(s):  
Numerical Analysis ◽  
Prospect Theory ◽  
Portfolio Selection ◽  
Cumulative Prospect Theory ◽  
Risky Asset ◽  
Model Parameters ◽  
Investment Strategies ◽  
Portfolio Constraints ◽  
Risk Criterion ◽  
Optimal Portfolio Selection

In this article, inspired by Shi et al., we investigate the optimal portfolio selection with one risk-free asset and one risky asset in a multiple period setting under the cumulative prospect theory (CPT) risk criterion. Compared with their study, our novelty is that we consider a stochastic benchmark and portfolio constraints. By performing a numerical analysis, we test the sensitivity of the optimal CPT investment strategies to different model parameters.

scholarly journals Dynamic Money Doctors under Cumulative Prospect Theory

2019 ◽  
pp. 1-26
Author(s):  
Liurui Deng ◽  
Lan Yang ◽  
Bolin Ma
Keyword(s):  
Prospect Theory ◽  
Portfolio Selection ◽  
Value Function ◽  
Cumulative Prospect Theory ◽  
Risky Asset ◽  
Investment Strategies ◽  
Portfolio Choices ◽  
Portfolio Managers ◽  
Dynamic Portfolio ◽  
Mean Variance

We investigate the interaction between investors and portfolio managers under cumulative prospect theory. We model trust in the manager and the relative anxiety about investing in a risky asset in an original way. Moreover, we study how trust and anxiety affect the manager’s fee and the portfolios of cumulative prospect theory investors. In contrast to previous work using the classical mean-variance preferences, there are two main novelties in our contribution. First, our research relies on cumulative prospect theory (CPT) rather than the classical mean-variance framework. Second, we focus on a dynamic portfolio selection. In other words, we formulate the optimal problem under multi-period setting. Besides, we attain an optimal portfolio choices in multi-period relying on the sub-game perfect investment strategies. Moreover, our research differs from traditional CPT work through an improved value function that accurately characterizes the reduction in anxiety suffered by the CPT investors from bearing risk when assisted by the portfolio managers’ help relative to when they lack such assistance.

scholarly journals Research on Decision-Making Behavior of Discretionary Lane-Changing Based on Cumulative Prospect Theory

2020 ◽  
Vol 2020 ◽  
pp. 1-16
Author(s):  
Xueqin Long ◽  
Liancai Zhang ◽  
Shanshan Liu ◽  
Jianjun Wang
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Real Data ◽  
Cumulative Prospect Theory ◽  
Reference Points ◽  
Model Parameters ◽  
Lane Changing ◽  
Actual Observation ◽  
The Difference ◽  
Lane Keeping

In this paper, the decision-making model of discretionary lane-changing is established using cumulative prospect theory (CPT). Through analyzing the vehicles’ dynamic running states, safety spacing calculating approaches for discretionary lane-changing and lane-keeping have been put forward firstly. Then, based on CPT, a lane-changing decision model with accelerating space as its utility is proposed by estimating the difference between actual spacings and the safety spacings for discretionary lane-changing as well as lane-keeping. In order to calculate the utility of discretionary lane-changing, dynamic reference points and a parameter representing driver’s risk preference are introduced into the model. With the real data collected from an urban expressway, the distribution of discretionary lane-changing duration is analyzed, and the model parameters are also calibrated. Furthermore, the applicability of the model is evaluated by comparing with the actual observation and random unity model. Finally, the sensitivity analysis of the model is carried out, that is, assessing the influence degree of each variable on the decision result. The study reveals that the CPT-based model can describe discretionary lane-changing behavior more accurately, which consider drivers’ risk-aversion during decision-making.

scholarly journals The Optimal Portfolio Selection Model underg-Expectation

2014 ◽  
Vol 2014 ◽  
pp. 1-12 ◽  
Author(s):  
Li Li
Keyword(s):  
Prospect Theory ◽  
Decision Rule ◽  
Portfolio Selection ◽  
Continuous Time ◽  
Optimal Solution ◽  
Selection Model ◽  
Optimal Portfolio ◽  
Optimal Portfolio Selection ◽  
Choquet Expectation ◽  
Portfolio Selection Model

This paper solves the optimal portfolio selection model under the framework of the prospect theory proposed by Kahneman and Tversky in the 1970s with decision rule replaced by theg-expectation introduced by Peng. This model was established in the general continuous time setting and firstly adopted theg-expectation to replace Choquet expectation adopted in the work of Jin and Zhou, 2008. Using different S-shaped utility functions andg-functions to represent the investors' different uncertainty attitudes towards losses and gains makes the model not only more realistic but also more difficult to deal with. Although the models are mathematically complicated and sophisticated, the optimal solution turns out to be surprisingly simple, the payoff of a portfolio of two binary claims. Also I give the economic meaning of my model and the comparison with that one in the work of Jin and Zhou, 2008.

An analytical approach for behavioral portfolio model with time discounting preference

2018 ◽  
Vol 52 (3) ◽  
pp. 691-712
Author(s):  
Guang Yang ◽  
Xinwang Liu ◽  
Jindong Qin ◽  
Ahmed Khan
Keyword(s):  
Portfolio Selection ◽  
Investment Strategy ◽  
Cumulative Prospect Theory ◽  
Investment Strategies ◽  
Short Term ◽  
Time Discounting ◽  
Present Bias ◽  
Proposed Model ◽  
Portfolio Selection Model

This paper presents a behavioral portfolio selection model with time discounting preference. Firstly, we discuss the portfolio selection problem and then modify this model based on cumulative prospect theory (CPT) as well as considering investors’ time discounting preference in psychology. Furthermore, an analytical solution with satisfying behavior is given for our proposed model, the results show that when investors’ goals are very ambitious, they put a high proportion of their wealth in long-term goals and adopt aggressive investment strategies with high leverage to reach short-term goals and the overall investment strategy also displays high leverage. Finally, numerical analysis is given and it is shown that investor who tends to future bias performs adequate confidence and patience whereas investor with present bias is apt to the immediate interests.

scholarly journals A Stochastic User Equilibrium Formulation for the Cumulative Prospect Theory-Based Cross-Nested Logit

2021 ◽  
Vol 2021 ◽  
pp. 1-10
Author(s):  
Dongmei Yan ◽  
Yang Yang
Keyword(s):  
Prospect Theory ◽  
User Equilibrium ◽  
Cumulative Prospect Theory ◽  
Model Parameters ◽  
Nested Logit ◽  
Stochastic User Equilibrium ◽  
Weighted Averages ◽  
Route Choice Behavior ◽  
Method Of Successive Averages ◽  
The Impact

The cumulative prospect theory provides a better description for route choice behavior of the travelers in an uncertain road network environment. In this study, we proposed a multiclass cumulative prospect value- (CPV-) based cross-nested logit (CNL) stochastic user equilibrium (SUE) model. For this model, an equivalent variational inequality (VI) model is provided, and the existence and equivalence of the model solutions are also proved. The method of successive averages (MSA), method of successive weighted averages (MSWA), and self-regulated averaging (SRA) method are designed and compared. In addition, the proposed multiclass CPV-based CNL SUE model is also compared with the multiclass utility value- (UV-) based CNL SUE model. The results show that the path flow assigned by the multiclass CPV-based CNL SUE model is more consistent with the actual situation. The impact of different model parameters on the cumulative prospect value (CPV) is investigated.

A penalized expected risk criterion for portfolio selection

2019 ◽  
Vol 9 (3) ◽  
pp. 386-400 ◽  
Author(s):  
Ronghua Luo ◽  
Yi Liu ◽  
Wei Lan
Keyword(s):  
Transaction Cost ◽  
Portfolio Selection ◽  
Stock Markets ◽  
Alternative Methods ◽  
Content Type ◽  
Out Of Sample ◽  
Risk Criterion ◽  
Optimal Portfolio Selection ◽  
Definition Of ◽  
Quantitative Definition

Purpose Under the classical mean-variance framework, the purpose of this paper is to investigate the properties of the instability of minimal variance portfolio and then propose a novel penalized expected risk criterion (PERC) for optimal portfolio selection. Design/methodology/approach The proposed method considers not only a portfolio’s expected risk, but also its instability that is quantified by the variance of the estimated portfolio weights. This study tests the out-of-sample performance of various portfolio selection methods on both China and US stock markets. Findings It is very useful to control portfolio stability in real application of portfolio selection. The empirical results on both US and China stock markets show that PERC portfolio effectively controls turnover and consequently the transaction cost, and that is why it is so competing compared with other alternative methods. Research limitations/implications The findings suggest that the rebalancing turnover and the associated transaction cost that is usually ignored in theoretical analysis play a very important role in real investment. Practical implications For investors, especially institutional investors, the rebalancing turnover and corresponding transaction cost must be carefully addressed. The variance of the estimated portfolio weights is a good candidate to quantify portfolio instability. Originality/value This study addresses the important role of portfolio instability and proposes a novel expected risk criterion for portfolio selection after the quantitative definition of portfolio instability.

OPTIMAL PORTFOLIO SELECTION STRATEGIES IN THE PRESENCE OF TRANSACTION COSTS

2006 ◽  
Vol 09 (04) ◽  
pp. 619-641
Author(s):  
QIANG MENG ◽  
ANANDA WEERASINGHE
Keyword(s):  
Portfolio Selection ◽  
Stock Price ◽  
Interesting Case ◽  
Optimal Portfolio ◽  
Risky Asset ◽  
Selection Policy ◽  
Optimal Portfolio Selection ◽  
Financial Goal ◽  
Short Sell ◽  
The Interest Rate

We consider an investor who has available a bank account (risk free asset) and a stock (risky asset). It is assumed that the interest rate for the risk free asset is zero and the stock price is modeled by a diffusion process. The wealth can be transferred between the two assets under a proportional transaction cost. Investor is allowed to obtain loans from the bank and also to short-sell the risky asset when necessary. The optimization problem addressed here is to maximize the probability of reaching a financial goal a before bankruptcy and to obtain an optimal portfolio selection policy. Our optimal policy is a combination of local-time processes and jumps. In the interesting case, it is determined by a non-linear switching curve on the state space. This work is a generalization of Weerasinghe [20], where this switching boundary is a vertical line segment.

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