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Mean-variance portfolio with wealth and volatility dependent risk aversion

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  • Shican Liu

Abstract

Risk aversion rate plays a significant role in mean-variance portfolio selection. Most existing literature assumes it to be constant or wealth dependent, which is unrealistic. In this study, I contend that it is both wealth and volatility dependent because it varies across economic status: either steady or fluctuated. In addition, I decompose the risk aversion rate into a wealth prudence rate and a volatility prudence rate and investigate their mutual effect on portfolio selection under a continuous-time mean-variance framework. Using Game theoretic approach and asymptotic expansion, I derive the optimal trading rule analytically.

Suggested Citation

  • Shican Liu, 2024. "Mean-variance portfolio with wealth and volatility dependent risk aversion," Quantitative Finance, Taylor & Francis Journals, vol. 24(6), pages 735-751, May.
  • Handle: RePEc:taf:quantf:v:24:y:2024:i:6:p:735-751
    DOI: 10.1080/14697688.2024.2353874
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