Behavioral dynamic portfolio selection with S-shaped utility and epsilon-contaminations

Inspired by the classical cumulative prospect theory (CPT), we propose a CPT-like functional characterized by the modeling of uncertainty on gains and losses through two epsilon-contaminations of a reference probability measure. Such functional is used to perform a dynamic portfolio selection in a finite horizon binomial market model, reducing it to an iterative search problem over the set of optimal solutions of a family of pairs of non-linear optimization problems on the final wealth. Despite the computational hardness of the resulting pairs of problems, epsilon-contaminations allow to represent each solution in terms of the partition generated by the stock price random variable at maturity, obtaining a sensible reduction of variables and constraints. In turn, the optimization task can be reduced to the maximization of a real-valued function of one real variable, revealing the possible ill-posedness of the problem. The resulting model is discussed by means of some paradigmatic examples on market data and a sensitivity analysis.

Authors

Publication Details

Journal
European Journal of Operational Research
Published
2025-04-08
DOI
https://doi.org/10.1016/j.ejor.2025.03.029
Citations
1
Primary Topic
Risk and Portfolio Optimization
Type
article
Field-Weighted Citation Impact
2.11

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article

Behavioral dynamic portfolio selection with S-shaped utility and epsilon-contaminations

Barbara Vantaggi, Andrea Cinfrignini, Davide Petturiti
1 citations
European Journal of Operational Research
Risk and Portfolio Optimization
2.11
article

Behavioral dynamic portfolio selection with S-shaped utility and epsilon-contaminations

Barbara Vantaggi, Andrea Cinfrignini, Davide Petturiti
article en
1 citations

Abstract

Inspired by the classical cumulative prospect theory (CPT), we propose a CPT-like functional characterized by the modeling of uncertainty on gains and losses through two epsilon-contaminations of a reference probability measure. Such functional is used to perform a dynamic portfolio selection in a finite horizon binomial market model, reducing it to an iterative search problem over the set of optimal solutions of a family of pairs of non-linear optimization problems on the final wealth. Despite the computational hardness of the resulting pairs of problems, epsilon-contaminations allow to represent each solution in terms of the partition generated by the stock price random variable at maturity, obtaining a sensible reduction of variables and constraints. In turn, the optimization task can be reduced to the maximization of a real-valued function of one real variable, revealing the possible ill-posedness of the problem. The resulting model is discussed by means of some paradigmatic examples on market data and a sensitivity analysis.

European Journal of Operational ResearchVol. 325(3)
Ministero dell'Università e della Ricerca
Openalex Percentile: Top 15%
Risk and Portfolio Optimization
2.11
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