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Distorted probability operator for dynamic portfolio optimization in times of socio-economic crisis

Author

Listed:
  • Kerem Uğurlu

    (Nazarbayev University)

  • Tomasz Brzeczek

    (Poznan University of Technology)

Abstract

A robust optimal control of discrete time Markov chains with finite terminal T and bounded costs or wealth using probability distortion is studied. The time inconsistency of these distortion operators and hence its lack of dynamic programming are discussed. Due to that, dynamic versions of these operators are introduced, and its availability for dynamic programming is demonstrated. Based on dynamic programming algorithm, existence of the optimal policy is justified and an application of the theory to portfolio optimization along with a numerical study is also presented.

Suggested Citation

  • Kerem Uğurlu & Tomasz Brzeczek, 2023. "Distorted probability operator for dynamic portfolio optimization in times of socio-economic crisis," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(4), pages 1043-1060, December.
    • Handle: RePEc:spr:cejnor:v:31:y:2023:i:4:d:10.1007_s10100-022-00834-0
    DOI: 10.1007/s10100-022-00834-0
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