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Time-consistent and self-coordination strategies for multi-period mean-Conditional Value-at-Risk portfolio selection

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  • Cui, Xiangyu
  • Gao, Jianjun
  • Shi, Yun
  • Zhu, Shushang

Abstract

The multi-period mean-Conditional Value-at-Risk (mean-CVaR) portfolio decision model is prone to time inconsistency problems that drive CVaR investors away from the pre-committed portfolio strategy, although this strategy is regarded as the global optimal strategy at the initial time point. In the existing literature, authors have proposed time-consistent and self-coordination strategies to solve the time inconsistency issue arising from other sequential decision problems. However, these strategies are rarely studied under the multi-period mean-CVaR portfolio decision framework. This work fills in these gaps by providing both computationally tractable methods and analytical solutions for these strategies. The revealed time-consistent strategy is a piecewise linear function of the wealth level, wherein the other parameters can be computed by solving a series of mixed-integer programming problems off line. The self-coordination strategy can be formulated as a convex program with a quadratic constraint. We also prove that the pre-committed strategy and the time-consistent strategy are the extreme cases of the self-coordination strategy. Furthermore, we extend our main findings to a regime-switching market setting.

Suggested Citation

  • Cui, Xiangyu & Gao, Jianjun & Shi, Yun & Zhu, Shushang, 2019. "Time-consistent and self-coordination strategies for multi-period mean-Conditional Value-at-Risk portfolio selection," European Journal of Operational Research, Elsevier, vol. 276(2), pages 781-789.
  • Handle: RePEc:eee:ejores:v:276:y:2019:i:2:p:781-789
    DOI: 10.1016/j.ejor.2019.01.045
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    8. Strub, Moris S. & Li, Duan & Cui, Xiangyu & Gao, Jianjun, 2019. "Discrete-time mean-CVaR portfolio selection and time-consistency induced term structure of the CVaR," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).

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