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Loss aversion, large deviation preferences and optimal portfolio weights for some classes of return processes

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Duffy, Ken R., Lobunets, Olena and Suhov, Yuri (2007) Loss aversion, large deviation preferences and optimal portfolio weights for some classes of return processes. Physica A: Statistical Mechanics and its Applications, 378 (2). pp. 408-422. ISSN 0378-4371

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Abstract

We propose a model of a loss averse investor who aims to maximize his expected wealth under certain constraints. The constraints are that he avoids, with high probability, incurring a (suitably dened) unacceptable loss. The methodology employed comes from the theory of large deviations. We explore a number of fundamental properties of the model and illustrate its desirable features. We demonstrate its utility by analyzing assets that follow some commonly used nancial return processes: Fractional Brownian Motion, Jump Diusion, Variance Gamma and Truncated Lévy.

Item Type:	Article
Keywords:	Portfolio selection; Loss averse investors; Large deviations approach; Hamilton Institute.
Academic Unit:	Faculty of Science and Engineering > Experimental Physics Faculty of Science and Engineering > Research Institutes > Hamilton Institute Faculty of Science and Engineering > Mathematics and Statistics
Item ID:	1719
Identification Number:	10.1016/j.physa.2006.11.079
Depositing User:	Hamilton Editor
Date Deposited:	07 Dec 2009 12:04
Journal or Publication Title:	Physica A: Statistical Mechanics and its Applications
Publisher:	Elsevier BV, North-Holland
Refereed:	Yes
Related URLs:	Publisher
URI:	https://mural.maynoothuniversity.ie/id/eprint/1719
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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