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Disparity, Shortfall, and Twice-Endogenous HARA Utility

Author

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  • Walker, Todd
  • Haley, M. Ryan
  • McGee, M. Kevin

Abstract

We demonstrate that shortfall-minimizing portfolio selection based on the Cressie- Read family of divergence measures maps to the HARA family. This means that all HARA utility functions can be interpreted as “endogenous” in the sense described in Stutzer (2003), and that traditional HARA expected utility maximization has an analog to the behavioral notion that an investor seeks to organize their selection of assets to minimize the probability of realizing a return below some pre-determined target or benchmark rate. We show that not only do risk aversion parameters arise endogenously, given the choice set, but that the type of risk aversion, relative or constant, is also determined endogenously. We also connect this approach to portfolio selection to some topics in behavioral economics.

Suggested Citation

  • Walker, Todd & Haley, M. Ryan & McGee, M. Kevin, 2009. "Disparity, Shortfall, and Twice-Endogenous HARA Utility," MPRA Paper 17139, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17139
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    References listed on IDEAS

    as
    1. Bawa, Vijay S, 1976. "Admissible Portfolios for All Individuals," Journal of Finance, American Finance Association, vol. 31(4), pages 1169-1183, September.
    2. 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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    Cited by:

    1. Chipeniuk, Karsten O. & Walker, Todd B., 2021. "Forward inflation expectations: Evidence from inflation caps and floors," Journal of Macroeconomics, Elsevier, vol. 70(C).
    2. Jules Sadefo Kamdem, 2023. "Risk-Adjusted Performance And Semi-Moments Of Non-Gaussian Portfolio Returns Distributions," Working Papers hal-04134833, HAL.
    3. M. Ryan Haley & Todd B. Walker, 2010. "Alternative tilts for nonparametric option pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(10), pages 983-1006, October.

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    More about this item

    Keywords

    Entropy; Measure Change; Cressie-Read; Endogenous Utility; Benchmark;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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