In this paper, we characterize dynamic investment strategies that are consistent with the expected utility setting and more generally forward setting. Two popular in pension funds industry used to illustrate our results: a constant proportion portfolio insurance (CPPI) strategy life-cycle strategy. For CPPI strategy, able infer preferences of fund's manager from her exhibit specific maximization makes optimal at any given time horizon. Black–Scholes market deterministic parameters, show...

Abstract To cope with the negative oil futures price caused by COVID–19 recession, global commodity exchanges temporarily switched option model from Black–Scholes to Bachelier in 2020. This study reviews literature on Bachelier's pioneering pricing and summarizes practical results volatility conversion, risk management, stochastic volatility, barrier options facilitate transition. In particular, using displaced as a family models special cases, we not only connect two but also present...

We study an optimal consumption, investment, life insurance, and retirement decision of economic agent who has option to retire early any time before the mandatory date. conduct a thorough theoretical analysis for problem with general utility function in presence date, which leads stopping finite horizon. Furthermore, different marginal consumption after is considered, can provide explanation retirement-consumption puzzle, while it makes technically more challenging. Based on theory partial...

We investigate a one-period portfolio optimization problem of cumulative prospect theory (CPT) investor with multiple risky assets and one risk-free asset. The returns the asset...

Abstract We provide an accurate approximation method for inverting option price to the implied volatility under arithmetic Brownian motion, which is widely quoted in Fixed Income markets. The maximum error order of 10−10 given and much smaller near-the-money options. Thus our can be used as exact solution without further refinements iterative methods. Key Words: Normal volatilitybasis point volatilityarithmetic motionrational approximationclosed form Acknowledgements This work was supported...

We propose an equilibrium pricing model in a dynamic multiperiod stochastic framework with uncertain income. There are one tradable risky asset (stock/commodity), nontradable underlying (temperature), and also contingent claim (weather derivative) written on the market. The price of is priced by optimal strategies representative agent market clearing condition. risk preferences exponential type coefficient aversion. Both subgame perfect strategy naive considered corresponding prices derived....

We consider a consumption, investment, life insurance, and retirement decision problem in which an economic agent is allowed to borrow against only part of future income. The closed-form solution attained by applying dual approach that directly imposes the conditions for borrowing limit on value function. provide analytic comparative statics optimal strategies with rigorous proofs. It confirmed more stringent leads less consumption insurance purchase. However, even tighter limit, weak...

It is considered ‘common sense’ among financial investors to maximize the portfolio return while satisfying some risk constraint. The mean-variance technique addressing this problem has been introd...

We investigate a one-period portfolio optimization problem of cumulative prospect theory (CPT) investor with multiple risky assets and one risk-free asset. The returns the follow multivariate generalized hyperbolic (GH) skewed t distribution. obtain three-fund separation result comprised two portfolios Furthermore, we reduce high-dimensional to 1-dimensional problems in order derive optimal portfolio. show that composition changes as some investor-specific parameters change. skewness stock...

We provide an accurate approximation method for inverting option price to the implied volatility under arithmetic Brownian motion. The maximum error in is order of 1e-10 given and much smaller near-the-money options. Thus our can be used as a near-exact solution without further refinements iterative methods.

We consider all or nothing investment problem with a finite time horizon when the opportunity set is changing stochastically over time, especially under Markovian regime-switching environment, and decision maker faces ambiguity of parameters governing profit flow dynamics investment. apply $\alpha$-Maxmin Expected Utility($\alpha$-MEU) preferences to reflect seeking attitude provide semi-explicit formulas for expected value critical present flow. Numerical results show that depends on...

We consider a capital at risk (CaR) minimization problem in an incomplete market Black-Scholes setting. The optimization is studied, given the possibility that correlation constraint between wealth process and financial index imposed. optimal portfolio not unique it analytically characterized. In special case of complete market, obtained closed form. effect also explored; turns out this leads to more diversified portfolio.

We study a continuous-time optimal consumption and portfolio selection problem when an economic agent with recursive utility has stochastic income debt-to-income (DTI) borrowing limits. The setup the time-varying constraints generates various novel implications for investment marginal propensity to consume (MPC). find that depends on elasticity of intertemporal substitution (EIS) due constraints, even if opportunity is constant. Our model provides testable implication stock market...