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Risk-Sensitive Asset Management

In: RISK-SENSITIVE INVESTMENT MANAGEMENT

Author

Listed:
  • Mark H. A. Davis
  • Sébastien Lleo

Abstract

In 1999 Tomasz Bielecki and Stanley Pliska proposed an alternative to the Merton model based on a risk-sensitive control criterion (Bielecki and Pliska, 1999). Their risk-sensitive asset management model has three appealing features: the optimisation criterion is intuitive, it is consistent with financial and economic theory, and it models explicitly the impact of exogenous factors on asset prices. Kazutaka Kuroda and Hideo Nagai (Kuroda and Nagai, 2002) soon made the connection between risk-sensitive asset management and linear regulator problems. A measure change along the lines of Section 1.4 provides the key argument. In parallel, Bielecki, Pliska and their coauthors extended risk-sensitive asset management in a series of articles published between 1999 and 2005 (Bielecki and Pliska, 1999; Bielecki et al., 1999; Bielecki and Pliska, 2000; Bielecki et al., 2000, 2001, 2002; Bielecki and Pliska, 2003, 2004; Bielecki et al., 2004, 2005)The objective of this chapter is to present the risk-sensitive asset management model in a 'diffusion' setting similar to that of Chapter 1 and to lay the foundations for the exploration of benchmarks, asset and liability management and jump-diffusion models in later chapters.

Suggested Citation

  • Mark H. A. Davis & Sébastien Lleo, 2014. "Risk-Sensitive Asset Management," World Scientific Book Chapters, in: RISK-SENSITIVE INVESTMENT MANAGEMENT, chapter 2, pages 17-40, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789814578059_0002
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    Citations

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    Cited by:

    1. Dariusz Zawisza, 2020. "On the parabolic equation for portfolio problems," Papers 2003.13317, arXiv.org, revised Oct 2020.
    2. Mark H.A. Davis & Sébastien Lleo, 2021. "Risk‐sensitive benchmarked asset management with expert forecasts," Mathematical Finance, Wiley Blackwell, vol. 31(4), pages 1162-1189, October.
    3. Hiroaki Hata, 2021. "Risk-Sensitive Asset Management with Lognormal Interest Rates," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(2), pages 169-206, June.
    4. Mark Davis & Sebastien Lleo, 2011. "Jump-Diffusion Risk-Sensitive Asset Management II: Jump-Diffusion Factor Model," Papers 1102.5126, arXiv.org, revised Sep 2012.
    5. Rüdiger Frey & Abdelali Gabih & Ralf Wunderlich, 2012. "Portfolio Optimization Under Partial Information With Expert Opinions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(01), pages 1-18.
    6. Jan Obłój & Thaleia Zariphopoulou, 2021. "In memoriam: Mark H. A. Davis and his contributions to mathematical finance," Mathematical Finance, Wiley Blackwell, vol. 31(4), pages 1099-1110, October.
    7. Arvidsson, Björn & Johansson, Jonas & Guldåker, Nicklas, 2021. "Critical infrastructure, geographical information science and risk governance: A systematic cross-field review," Reliability Engineering and System Safety, Elsevier, vol. 213(C).

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