Worst-case optimal investment with a random number of crashes

Christoph Belak; Sören Christensen; Olaf Menkens

doi:10.1016/j.spl.2014.03.021

Worst-case optimal investment with a random number of crashes

Christoph Belak, Sören Christensen, Olaf Menkens

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

We study a portfolio optimization problem in a market which is under the threat of crashes. At random times, the investor receives a warning that a crash in the risky asset might occur. We construct a strategy which renders the investor indifferent about an immediate crash of maximum size and no crash at all. We then verify that this strategy outperforms every other trading strategy using a direct comparison approach. We conclude with numerical examples and calculating the costs of hedging against crashes.

Original language	English
Pages (from-to)	140-148
Number of pages	9
Journal	Statistics and Probability Letters
Volume	90
Issue number	1
DOIs	https://doi.org/10.1016/j.spl.2014.03.021
State	Published - Jul 2014
Externally published	Yes

Keywords

Financial bubbles
Market crashes
Optimal investment
Worst-case scenario

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10.1016/j.spl.2014.03.021

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KW - Optimal investment

KW - Worst-case scenario

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Worst-case optimal investment with a random number of crashes

Abstract

Keywords

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