Rank-Dependent Utility Maximization Under Risk Exposure Constraint

22 Pages Posted: 9 Mar 2018

See all articles by Peizhen Ding

Peizhen Ding

Chinese Academy of Sciences (CAS)

Zuo Quan Xu

Hong Kong Polytechnic University

Date Written: May 23, 2017

Abstract

This paper analyzes the optimal investment policies of rank-dependent utility maximizing investor who must manage the risk exposure using a general law- invariant risk measure such as Value-at-Risk and tail Value-at-Risk. The analytic optimal solution is obtained via the so-called quantile formulation and relaxation method. We find that the investor must control the risk exposure when he/she has not enough money to invest or the constraint is very restrictive.

Keywords: Rank-dependent utility theory, probability distortion/weighting function, quantile formulation, VaR, tail VaR, relaxation method

Suggested Citation

Ding, Peizhen and Xu, Zuo Quan, Rank-Dependent Utility Maximization Under Risk Exposure Constraint (May 23, 2017). Available at SSRN: https://ssrn.com/abstract=3135695 or http://dx.doi.org/10.2139/ssrn.3135695

Peizhen Ding

Chinese Academy of Sciences (CAS) ( email )

52 Sanlihe Rd.
Datun Road, Anwai
Beijing, Xicheng District 100864
China

Zuo Quan Xu (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon, 0
Hong Kong

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