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Pessimistic Portfolio Allocation and Choquet Expected Utility

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  • Gilbert W. Bassett

Abstract

Recent developments in the theory of choice under uncertainty and risk yield a pessimistic decision theory that replaces the classical expected utility criterion with a Choquet expectation that accentuates the likelihood of the least favorable outcomes. A parallel theory has recently emerged in the literature on risk assessment. It is shown that a general form of pessimistic portfolio optimization based on the Choquet approach may be formulated as a problem of linear quantile regression. Copyright 2004, Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 2 (2004)
Issue (Month): 4 ()
Pages: 477-492

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Handle: RePEc:oup:jfinec:v:2:y:2004:i:4:p:477-492

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  1. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 323-343, December.
  2. Robert Engle & Simone Manganelli, 2000. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0841, Econometric Society.
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  4. Christoffersen, Peter F. & Diebold, Francis X., 2003. "Financial asset returns, direction-of-change forecasting, and volatility dynamics," CFS Working Paper Series, Center for Financial Studies (CFS) 2004/08, Center for Financial Studies (CFS).
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  6. De Giorgi, Enrico, 2005. "Reward-risk portfolio selection and stochastic dominance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(4), pages 895-926, April.
  7. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 95-115, January.
  8. Andrzej Ruszczynski & Robert J. Vanderbei, 2003. "Frontiers of Stochastically Nondominated Portfolios," Econometrica, Econometric Society, Econometric Society, vol. 71(4), pages 1287-1297, 07.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. Oliver Linton & Yoon-Jae Whang, 2003. "A quantilogram approach to evaluating directional predictability," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2112, London School of Economics and Political Science, LSE Library.
  11. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, Springer, vol. 7(2), pages 147-75, October.
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Cited by:
  1. Kuan, Chung-Ming & Yeh, Jin-Huei & Hsu, Yu-Chin, 2009. "Assessing value at risk with CARE, the Conditional Autoregressive Expectile models," Journal of Econometrics, Elsevier, Elsevier, vol. 150(2), pages 261-270, June.
  2. Marc Hallin & Davy Paindaveine & Miroslav Šiman, 2010. "Multivariate quantiles and multiple-output regression quantiles: From L1 optimization to halfspace depth," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/127979, ULB -- Universite Libre de Bruxelles.
  3. Manganelli, Simone, 2007. "Asset allocation by penalized least squares," Working Paper Series, European Central Bank 0723, European Central Bank.
  4. Oliver Linton & Yoon-Jae Whang, 2003. "A quantilogram approach to evaluating directional predictability," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2112, London School of Economics and Political Science, LSE Library.
  5. repec:wyi:journl:002094 is not listed on IDEAS
  6. Melenberg, B. & Polbennikov, S.Y., 2005. "Testing for Mean-Coherent Regular Risk Spanning," Discussion Paper, Tilburg University, Center for Economic Research 2005-99, Tilburg University, Center for Economic Research.
  7. Alexandre Street, 2010. "On the Conditional Value-at-Risk probability-dependent utility function," Theory and Decision, Springer, Springer, vol. 68(1), pages 49-68, February.
  8. repec:wyi:wpaper:001957 is not listed on IDEAS
  9. Antony Millner & Simon Dietz & Geoffrey Heal, 2010. "Ambiguity and climate policy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 37595, London School of Economics and Political Science, LSE Library.
  10. Bassett, Gilbert Jr., 2005. "Proposing a dinner date: analysis by rank-dependent expected utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 58(3), pages 393-402, November.
  11. Adam, Alexandre & Houkari, Mohamed & Laurent, Jean-Paul, 2008. "Spectral risk measures and portfolio selection," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(9), pages 1870-1882, September.
  12. Pauline Barrieu & Bernard Sinclair-Desgagné, 2009. "Economic Policy when Models Disagree," CIRANO Working Papers, CIRANO 2009s-03, CIRANO.
  13. Kim, Kwansoo & Chavas, Jean-Paul & Barham, Bradford L. & Foltz, Jeremy D., 2012. "Rice, Irrigation and Downside Risk: A Quantile Analysis of Risk Exposure and Mitigation on Korean Farms," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124814, Agricultural and Applied Economics Association.
  14. Polbennikov, S.Y. & Melenberg, B., 2005. "Mean-Coherent Risk and Mean-Variance Approaches in Portfolio Selection: An Empirical Comparison," Discussion Paper, Tilburg University, Center for Economic Research 2005-100, Tilburg University, Center for Economic Research.
  15. Brandtner, Mario, 2013. "Conditional Value-at-Risk, spectral risk measures and (non-)diversification in portfolio selection problems – A comparison with mean–variance analysis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5526-5537.
  16. Antony Millner & Simon Dietz & Geoffrey Heal, 2013. "Scientific Ambiguity and Climate Policy," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 55(1), pages 21-46, May.

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