Composite time-consistent multi-period risk measure and its application in optimal portfolio selection

• Zhiping Chen ^[1] ; Jia Liu ^[1] ; Gang Li ^[1] ; Zhe Yan ^[1]
  1. [1] Xi'an Jiaotong University

     Xi'an Jiaotong University

     China

     
• Localización: Top, ISSN-e 1863-8279, ISSN 1134-5764, Vol. 24, Nº. 3, 2016, págs. 515-540
• Idioma: inglés
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• Resumen

  • Through the composition of two real-valued functions, we propose a new class of multi-period risk measure which is time consistent. The new multi-period risk measure is monotonous and convex when the two real-valued functions satisfy monotonicity and convexity. Based on this generic framework, we construct a specific class of time-consistent multi-period risk measure by considering the lower partial moment between the realized wealth and the target wealth at individual periods. With the new multi-period risk measure as the objective function, we formulate a multi-period portfolio selection model by considering transaction costs at individual investment periods. Furthermore, this stochastic programming model is transformed into a deterministic programming problem using the scenario tree technology. Finally, we show through empirical tests and comparisons the rationality, practicality and efficiency of our new multi-period risk measure and the corresponding portfolio selection model.