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Composite time-consistent multi-period risk measure and its application in optimal portfolio selection

Author

Listed:
  • Zhiping Chen

    (Xi’an Jiaotong University)

  • Jia Liu

    (Xi’an Jiaotong University)

  • Gang Li

    (Xi’an Jiaotong University)

  • Zhe Yan

    (Xi’an Jiaotong University)

Abstract

Through the composition of two real-valued functions, we propose a new class of multi-period risk measure which is time consistent. The new multi-period risk measure is monotonous and convex when the two real-valued functions satisfy monotonicity and convexity. Based on this generic framework, we construct a specific class of time-consistent multi-period risk measure by considering the lower partial moment between the realized wealth and the target wealth at individual periods. With the new multi-period risk measure as the objective function, we formulate a multi-period portfolio selection model by considering transaction costs at individual investment periods. Furthermore, this stochastic programming model is transformed into a deterministic programming problem using the scenario tree technology. Finally, we show through empirical tests and comparisons the rationality, practicality and efficiency of our new multi-period risk measure and the corresponding portfolio selection model.

Suggested Citation

  • Zhiping Chen & Jia Liu & Gang Li & Zhe Yan, 2016. "Composite time-consistent multi-period risk measure and its application in optimal portfolio selection," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 24(3), pages 515-540, October.
    • Handle: RePEc:spr:topjnl:v:24:y:2016:i:3:d:10.1007_s11750-015-0407-7
    DOI: 10.1007/s11750-015-0407-7
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