Rank-Dependent Utility Maximization Under Risk Exposure Constraint
22 Pages Posted: 9 Mar 2018
Date Written: May 23, 2017
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
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