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Portfolio choice with skewness preference and wealth-dependent risk aversion

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  • Congming Mu
  • Weidong Tian
  • Jinqiang Yang

Abstract

This paper studies a dynamic portfolio choice problem for an investor with both wealth-dependent risk aversion and wealth-dependent skewness preferences. In a general economic setting, the solution is characterized in terms of a system of extended Hamilton-Jacobi-Bellman (EHJB) equations and the solution is given in closed form in some special cases. We demonstrate the effects of higher order risk preferences and state-dependent risk aversion on the optimal asset allocation decisions. We find that wealth-dependent risk aversion facilitates risk taking and the skewness preference leads to a more positively skewed portfolio in certain circumstances.

Suggested Citation

  • Congming Mu & Weidong Tian & Jinqiang Yang, 2019. "Portfolio choice with skewness preference and wealth-dependent risk aversion," Quantitative Finance, Taylor & Francis Journals, vol. 19(11), pages 1905-1919, November.
    • Handle: RePEc:taf:quantf:v:19:y:2019:i:11:p:1905-1919
    DOI: 10.1080/14697688.2019.1592214
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    Cited by:

    1. Michael Senescall & Rand Kwong Yew Low, 2024. "Quantitative Portfolio Management: Review and Outlook," Mathematics, MDPI, vol. 12(18), pages 1-25, September.

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