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Disparity, Shortfall, and Twice-Endogenous HARA Utility

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  • M. Ryan Haley
  • M. Kevin McGee
  • Todd B. Walker

Abstract

We derive a mapping between the shortfall-minimizing portfolio selection based on higher-order entropy measures and expected utility theory. We show that the family of HARA utility functions has a minimum-divergence, shortfall-based representation. This facilitates an interpretation in which the risk aversion parameters and the type of risk aversion arise endogenously. We provide a numerical example illustrating this interpretation.

Suggested Citation

  • M. Ryan Haley & M. Kevin McGee & Todd B. Walker, 2013. "Disparity, Shortfall, and Twice-Endogenous HARA Utility," Econometric Reviews, Taylor & Francis Journals, vol. 32(4), pages 524-541, December.
    • Handle: RePEc:taf:emetrv:v:32:y:2013:i:4:p:524-541
    DOI: 10.1080/07474938.2012.690672
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    References listed on IDEAS

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    1. Bawa, Vijay S, 1976. "Admissible Portfolios for All Individuals," Journal of Finance, American Finance Association, vol. 31(4), pages 1169-1183, September.
    2. Basu, Ayanendranath & Park, Chanseok & Lindsay, Bruce G. & Li, Haihong, 2004. "Some variants of minimum disparity estimation," Computational Statistics & Data Analysis, Elsevier, vol. 45(4), pages 741-763, May.
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    Cited by:

    1. Chipeniuk, Karsten O. & Walker, Todd B., 2021. "Forward inflation expectations: Evidence from inflation caps and floors," Journal of Macroeconomics, Elsevier, vol. 70(C).
    2. Jules Sadefo Kamdem, 2023. "Risk-Adjusted Performance And Semi-Moments Of Non-Gaussian Portfolio Returns Distributions," Working Papers hal-04134833, HAL.
    3. M. Ryan Haley & Todd B. Walker, 2010. "Alternative tilts for nonparametric option pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(10), pages 983-1006, October.

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    JEL classification:

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

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