Disparity, Shortfall, and Twice-Endogenous HARA Utility
We derive a mapping between the shortfall-minimizing portfolio selection based on higher-order entropy measures and expected utility theory. We show that the family of HARA utility functions has a minimum-divergence, shortfall-based representation. This facilitates an interpretation in which the risk aversion parameters and the type of risk aversion arise endogenously. We provide a numerical example illustrating this interpretation.
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Volume (Year): 32 (2013)
Issue (Month): 4 (December)
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- Bawa, Vijay S, 1976. "Admissible Portfolios for All Individuals," Journal of Finance, American Finance Association, vol. 31(4), pages 1169-83, September.
- Basu, Ayanendranath & Park, Chanseok & Lindsay, Bruce G. & Li, Haihong, 2004. "Some variants of minimum disparity estimation," Computational Statistics & Data Analysis, Elsevier, vol. 45(4), pages 741-763, May.
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