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Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation

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  • Jón Daníelsson
  • Bjørn Jorgensen
  • Casper Vries
  • Xiaoguang Yang

Abstract

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  • Jón Daníelsson & Bjørn Jorgensen & Casper Vries & Xiaoguang Yang, 2008. "Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation," Annals of Finance, Springer, vol. 4(3), pages 345-367, July.
    • Handle: RePEc:kap:annfin:v:4:y:2008:i:3:p:345-367
    DOI: 10.1007/s10436-007-0081-3
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    References listed on IDEAS

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    1. Grossman, Sanford J & Vila, Jean-Luc, 1989. "Portfolio Insurance in Complete Markets: A Note," The Journal of Business, University of Chicago Press, vol. 62(4), pages 473-476, October.
    2. Rohit Rahi & José M. Marín, 1999. "Speculative securities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 653-668.
    3. Basak, Suleyman & Shapiro, Alexander, 2001. "Value-at-Risk-Based Risk Management: Optimal Policies and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 371-405.
    4. Leland, Hayne E, 1980. "Who Should Buy Portfolio Insurance?," Journal of Finance, American Finance Association, vol. 35(2), pages 581-594, May.
    5. Allen, Franklin & Gale, Douglas, 1991. "Arbitrage, Short Sales, and Financial Innovation," Econometrica, Econometric Society, vol. 59(4), pages 1041-1068, July.
    6. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
    7. Stephen A. Ross, 1976. "Options and Efficiency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(1), pages 75-89.
    8. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 459-471, December.
    9. Merton H. Miller, 1992. "Financial Innovation: Achievements And Prospects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 4-11, January.
    10. Mark Grinblatt & Francis A. Longstaff, 2000. "Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury STRIPS Program," Journal of Finance, American Finance Association, vol. 55(3), pages 1415-1436, June.
    11. Cornelius M. Schilbred, 1973. "The Market Price of Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(2), pages 283-292.
    12. Green, Richard C. & Rydqvist, Kristian, 1999. "Ex-day behavior with dividend preference and limitations to short-term arbitrage: the case of Swedish lottery bonds," Journal of Financial Economics, Elsevier, vol. 53(2), pages 145-187, August.
    13. Arzac, Enrique R. & Bawa, Vijay S., 1977. "Portfolio choice and equilibrium in capital markets with safety-first investors," Journal of Financial Economics, Elsevier, vol. 4(3), pages 277-288, May.
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    Citations

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    Cited by:

    1. E. Birgin & L. Bueno & N. Krejić & J. Martínez, 2011. "Low order-value approach for solving VaR-constrained optimization problems," Journal of Global Optimization, Springer, vol. 51(4), pages 715-742, December.
    2. Ba Chu, 2012. "Large deviations estimation of the windfall and shortfall probabilities for optimal diversified portfolios," Annals of Finance, Springer, vol. 8(1), pages 97-122, February.
    3. Álvaro Porras & Concepción Domínguez & Juan Miguel Morales & Salvador Pineda, 2023. "Tight and Compact Sample Average Approximation for Joint Chance-Constrained Problems with Applications to Optimal Power Flow," INFORMS Journal on Computing, INFORMS, vol. 35(6), pages 1454-1469, November.
    4. Frank Milne, 2008. "Credit Crises, Risk Management Systems and Liquidity Modelling," Working Papers 1, John Deutsch Institute for the Study of Economic Policy.
    5. Hałaj, Grzegorz, 2013. "Optimal asset structure of a bank - bank reactions to stressful market conditions," Working Paper Series 1533, European Central Bank.
    6. Wu, Meng & Zhu, Stuart X. & Teunter, Ruud H., 2013. "The risk-averse newsvendor problem with random capacity," European Journal of Operational Research, Elsevier, vol. 231(2), pages 328-336.
    7. Fr'ed'eric Butin, 2020. "Generalized distance to a simplex and a new geometrical method for portfolio optimization," Papers 2009.08826, arXiv.org.
    8. Lwin, Khin T. & Qu, Rong & MacCarthy, Bart L., 2017. "Mean-VaR portfolio optimization: A nonparametric approach," European Journal of Operational Research, Elsevier, vol. 260(2), pages 751-766.
    9. Daníelsson, Jón & Jorgensen, Bjørn N. & Samorodnitsky, Gennady & Sarma, Mandira & de Vries, Casper G., 2013. "Fat tails, VaR and subadditivity," Journal of Econometrics, Elsevier, vol. 172(2), pages 283-291.

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    More about this item

    Keywords

    Portfolio optimization; Value-at-risk; Computational complexity; State–price density; G11;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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