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Dynamic portfolio selection under generalized disappointment aversion

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  • Zongxia Liang
  • Sheng Wang
  • Jianming Xia
  • Fengyi Yuan

Abstract

This paper addresses the continuous-time portfolio selection problem under generalized disappointment aversion (GDA). The implicit definition of the certainty equivalent within GDA preferences introduces time inconsistency to this problem. We provide the sufficient and necessary condition for a strategy to be an equilibrium by a fully nonlinear integral equation. Investigating the existence and uniqueness of the solution to the integral equation, we establish the existence and uniqueness of the equilibrium. Our findings indicate that under disappointment aversion preferences, non-participation in the stock market is the unique equilibrium. The semi-analytical equilibrium strategies obtained under the constant relative risk aversion utility functions reveal that, under GDA preferences, the investment proportion in the stock market consistently remains smaller than the investment proportion under classical expected utility theory. The numerical analysis shows that the equilibrium strategy's monotonicity concerning the two parameters of GDA preference aligns with the monotonicity of the degree of risk aversion.

Suggested Citation

  • Zongxia Liang & Sheng Wang & Jianming Xia & Fengyi Yuan, 2024. "Dynamic portfolio selection under generalized disappointment aversion," Papers 2401.08323, arXiv.org, revised Mar 2024.
  • Handle: RePEc:arx:papers:2401.08323
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    References listed on IDEAS

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    Cited by:

    1. Jiaqin Wei & Jianming Xia & Qian Zhao, 2024. "Time-Consistent Portfolio Selection for Rank-Dependent Utilities in an Incomplete Market," Papers 2409.19259, arXiv.org.

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