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Multi-Period Investment Strategies under Cumulative Prospect Theory

Author

Listed:
  • Liurui Deng

    (College of Economics and Management, Hunan Normal University, Changsha 410081, China
    These authors contributed equally to this work.)

  • Traian A. Pirvu

    (Department of Mathematics and Statistics, McMaster University, 1280 Main Street West, Hamilton, ON L8S 4K1, Canada
    These authors contributed equally to this work.)

Abstract

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.

Suggested Citation

  • Liurui Deng & Traian A. Pirvu, 2019. "Multi-Period Investment Strategies under Cumulative Prospect Theory," JRFM, MDPI, vol. 12(2), pages 1-15, May.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:2:p:83-:d:230229
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    References listed on IDEAS

    as
    1. Traian A. Pirvu & Huayue Zhang, 2013. "Utility Indifference Pricing: A Time Consistent Approach," Applied Mathematical Finance, Taylor & Francis Journals, vol. 20(4), pages 304-326, September.
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
    4. Hanqing Jin & Xun Yu Zhou, 2008. "Behavioral Portfolio Selection In Continuous Time," Mathematical Finance, Wiley Blackwell, vol. 18(3), pages 385-426, July.
    5. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
    6. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    7. Duan Li & Wan‐Lung Ng, 2000. "Optimal Dynamic Portfolio Selection: Multiperiod Mean‐Variance Formulation," Mathematical Finance, Wiley Blackwell, vol. 10(3), pages 387-406, July.
    8. repec:dau:papers:123456789/5461 is not listed on IDEAS
    9. Francisco Guijarro, 2018. "A similarity measure for the cardinality constrained frontier in the mean–variance optimization model," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 69(6), pages 928-945, June.
    10. Bernard, Carole & Ghossoub, Mario, 2009. "Static Portfolio Choice under Cumulative Prospect Theory," MPRA Paper 15446, University Library of Munich, Germany.
    11. Jonathan Ingersoll, 2008. "Non‐Monotonicity of the Tversky‐Kahneman Probability‐Weighting Function: A Cautionary Note," European Financial Management, European Financial Management Association, vol. 14(3), pages 385-390, June.
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    Cited by:

    1. Tetiana Zholonko & Olesia Grebinchuk & Maryna Bielikova & Yurii Kulynych & Olena Oviechkina, 2021. "Methodological Tools for Investment Risk Assessment for the Companies of Real Economy Sector," JRFM, MDPI, vol. 14(2), pages 1-10, February.
    2. Giannikos, Christos I. & Kakolyris, Andreas & Suen, Tin Shan, 2023. "Prospect theory and a manager's decision to trade a blind principal bid basket," Global Finance Journal, Elsevier, vol. 55(C).

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