Optimal investment with S-shaped utility and trading and value at risk constraints: An application to defined contribution pension plan
File(s)
Accepted version
Author(s)
Dong, Yinghui
Zheng, Harry
Type
Journal Article
Abstract
In this paper we investigate an optimal investment problem under loss aversion (S-shaped utility) and with trading and Value-at-Risk (VaR) constraints faced by a defined contribution (DC) pension fund manager. We apply the concavification and dual control method to solve the problem and derive the closed-form representation of the optimal terminal wealth in terms of a controlled dual state variable. We propose a simple and effective algorithm for computing the initial dual state value, the Lagrange multiplier and the optimal terminal wealth. Theoretical and numerical results show that the VaR constraint can significantly impact the distribution of the optimal terminal wealth and may greatly reduce the risk of losses in bad economic states due to loss aversion.
Date Issued
2020-03-01
Date Acceptance
2019-08-19
Citation
European Journal of Operational Research, 2020, 281 (2), pp.341-356
ISSN
0377-2217
Publisher
Elsevier BV
Start Page
341
End Page
356
Journal / Book Title
European Journal of Operational Research
Volume
281
Issue
2
Copyright Statement
© 2019 Elsevier Ltd. All rights reserved. This manuscript is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence http://creativecommons.org/licenses/by-nc-nd/4.0/.
Subjects
Operations Research
Publication Status
Published
Date Publish Online
2019-08-27