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Recursive risk measures under regime switching applied to portfolio selection

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  • Zhiping Chen
  • Jia Liu
  • Yongchang Hui

Abstract

In this paper, we define the conditional risk measure under regime switching and derive a class of time consistent multi-period risk measures. To do so, we describe the information process with regime switching in a product space associated with the product of two filtrations. Moreover, we show how to establish the corresponding multi-stage portfolio selection models using the time consistent multi-period risk measure for medium-term or long-term investments. Take the conditional value-at-risk measure as an example, we demonstrate the resulting multi-stage portfolio selection problem can be transformed into a second-order cone programming problem. Finally, we carry out a series of empirical tests to illustrate the superior performance of the proposed random framework and the corresponding multi-stage portfolio selection model.

Suggested Citation

  • Zhiping Chen & Jia Liu & Yongchang Hui, 2017. "Recursive risk measures under regime switching applied to portfolio selection," Quantitative Finance, Taylor & Francis Journals, vol. 17(9), pages 1457-1476, September.
    • Handle: RePEc:taf:quantf:v:17:y:2017:i:9:p:1457-1476
    DOI: 10.1080/14697688.2016.1267393
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    Citations

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    Cited by:

    1. Zhiping Chen & Liyuan Wang & Ping Chen & Haixiang Yao, 2019. "Continuous-Time Mean–Variance Optimization For Defined Contribution Pension Funds With Regime-Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(06), pages 1-33, September.
    2. Zhe Yan & Zhiping Chen & Giorgio Consigli & Jia Liu & Ming Jin, 2020. "A copula-based scenario tree generation algorithm for multiperiod portfolio selection problems," Annals of Operations Research, Springer, vol. 292(2), pages 849-881, September.
    3. Hyungbin Park, 2021. "Modified Mean-Variance Risk Measures for Long-Term Portfolios," Mathematics, MDPI, vol. 9(2), pages 1-23, January.
    4. Liu, Jia & Chen, Zhiping, 2018. "Time consistent multi-period robust risk measures and portfolio selection models with regime-switching," European Journal of Operational Research, Elsevier, vol. 268(1), pages 373-385.
    5. Zhiping Chen & Xinkai Zhuang & Jia Liu, 2019. "A Sustainability-Oriented Enhanced Indexation Model with Regime Switching and Cardinality Constraint," Sustainability, MDPI, vol. 11(15), pages 1-14, July.
    6. Wang, Qiyu & Huang, Wenli & Wu, Xin & Zhang, Chao, 2019. "How effective is the tail mean-variance model in the fund of fund selection? An empirical study using various risk measures," Finance Research Letters, Elsevier, vol. 29(C), pages 239-244.

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