We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
The importance of dynamic risk constraints for limited liability operators.
- Authors
Armstrong, John; Brigo, Damiano; Tse, Alex S. L.
- Abstract
Previous literature shows that prevalent risk measures such as value at risk or expected shortfall are ineffective to curb excessive risk-taking by a tail-risk-seeking trader with S-shaped utility function in the context of portfolio optimisation. However, these conclusions hold only when the constraints are static in the sense that the risk measure is just applied to the terminal portfolio value. In this paper, we consider a portfolio optimisation problem featuring S-shaped utility and a dynamic risk constraint which is imposed throughout the entire trading horizon. Provided that the risk control policy is sufficiently strict relative to the Sharpe ratio of the asset, the trader's portfolio strategies and the resulting maximal expected utility can be effectively constrained by a dynamic risk measure. Finally, we argue that dynamic risk constraints might still be ineffective if the trader has access to a derivatives market.
- Subjects
LIMITED liability; VALUE at risk; LOSS control; SHARPE ratio; PORTFOLIO management (Investments); EXPECTED utility
- Publication
Annals of Operations Research, 2024, Vol 336, Issue 1/2, p861
- ISSN
0254-5330
- Publication type
Article
- DOI
10.1007/s10479-023-05295-5