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Title: Time consistent behavioral portfolio policy for dynamic mean-variance formulation
Authors: Cui, XY
Li, X 
Li, D
Shi, Y
Keywords: Investment analysis
State-dependent risk aversion
Dynamic mean-variance formulation
Time consistency
Behavioral portfolio policy
Issue Date: 2017
Publisher: Palgrave Macmillan
Source: Journal of the Operational Research Society, Dec. 2017, v. 68, no. 12, p. 1647-1660 How to cite?
Journal: Journal of the Operational Research Society 
Abstract: When one considers an optimal portfolio policy under a mean-risk formulation, it is essential to correctly model investors' risk aversion which may be time variant or even state dependent. In this paper, we propose a behavioral risk aversion model, in which risk aversion is a piecewise linear function of the current excess wealth level with a reference point at the discounted investment target (either surplus or shortage), to reflect a behavioral pattern with both house money and break-even effects. Due to the time inconsistency of the resulting multi-period mean-variance model with adaptive risk aversion, we investigate the time consistent behavioral portfolio policy by solving a nested mean-variance game formulation. We derive a semi-analytical time consistent behavioral portfolio policy which takes a piecewise linear feedback form of the current excess wealth level with respect to the discounted investment target. Finally, we extend the above results to time consistent behavioral portfolio selection for dynamic mean-variance formulation with a cone constraint.
ISSN: 0160-5682
EISSN: 1476-9360
DOI: 10.1057/s41274-017-0179-6
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