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Dynamic Option-Based Strategies under Downside Loss Averse Preferences

Author

Listed:
  • Amine Jalal

    (Goldman Sachs International)

Abstract

In this paper, dynamic option-based investment strategies are derived and illustrated for investors exhibiting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock

Suggested Citation

  • Amine Jalal, 2007. "Dynamic Option-Based Strategies under Downside Loss Averse Preferences," Swiss Finance Institute Research Paper Series 07-34, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0734
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    File URL: http://ssrn.com/abstract=1020263
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    More about this item

    Keywords

    Asset allocation; Downside risk; Stochastic volatility; jumps.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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