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Portfolio choice under cumulative prospect theory: sensitivity analysis and an empirical study

Author

Listed:
  • Giorgio Consigli

    (University of Bergamo)

  • Asmerilda Hitaj

    (University of Pavia)

  • Elisa Mastrogiacomo

    (Insubria University)

Abstract

A sensitivity analysis of the impact of cumulative prospect theory (CPT) parameters on a Mean/Risk efficient frontier is performed through a simulation procedure, assuming a Multivariate Variance Gamma distribution for log-returns. The optimal investment problem for an agent with CPT preferences is then investigated empirically, by considering different parameters’ combinations for the CPT utility function. Three different portfolios, one hedge fund and two equity portfolios are considered in this study, where the Modified Herfindahl index is used as a measure of portfolio diversification, while the Omega ratio and the Information ratio are used as measures of performance.

Suggested Citation

  • Giorgio Consigli & Asmerilda Hitaj & Elisa Mastrogiacomo, 2019. "Portfolio choice under cumulative prospect theory: sensitivity analysis and an empirical study," Computational Management Science, Springer, vol. 16(1), pages 129-154, February.
    • Handle: RePEc:spr:comgts:v:16:y:2019:i:1:d:10.1007_s10287-018-0333-x
    DOI: 10.1007/s10287-018-0333-x
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    References listed on IDEAS

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    Cited by:

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    3. Sweksha Srivastava & Abha Aggarwal & Pooja Bansal, 2024. "Efficiency Evaluation of Assets and Optimal Portfolio Generation by Cross Efficiency and Cumulative Prospect Theory," Computational Economics, Springer;Society for Computational Economics, vol. 63(1), pages 129-158, January.
    4. Taras Bodnar & Dmytro Ivasiuk & Nestor Parolya & Wolfgang Schmid, 2023. "Multi-period power utility optimization under stock return predictability," Computational Management Science, Springer, vol. 20(1), pages 1-27, December.
    5. Massimiliano Kaucic & Filippo Piccotto & Gabriele Sbaiz & Giorgio Valentinuz, 2023. "Optimal Portfolio with Sustainable Attitudes under Cumulative Prospect Theory," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(4), pages 1-4.

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