Long-term decision making in the presence of financial disasters
Ilias Chondrogiannis
2134/32644
https://repository.lboro.ac.uk/articles/thesis/Long-term_decision_making_in_the_presence_of_financial_disasters/9495713
The research question focuses on three areas. First, what is the most appropriate model
and estimation method for studying portfolio optimisation under tail risk with an aim
towards managerial incentives. Second, how outcomes differ for investors who take jumps
into account compared to those who do not. Third, how managerial incentives in the
form of fees and compensation structures create a conflict of interest between investors
and funds in the presence of jumps, leading to a need for policy suggestions. To answer
those questions the thesis builds up from a CARA single-state model to an SV model
to an SVCJ model with jumps in returns and volatility, leverage and heteroskedasticity.
The model and its SV only counterpart are estimated via MCMC. A closed-form solution
for the portfolio weights is derived and used in subsequent simulations. The results are
that the investor always has an incentive to knowingly ignore tail risk in terms of wealth
but never in terms of utility, the manager has an incentive in the short- and mid-run to
undertake excess risk but not in the long-run, the criteria for the incentive horizon are
risk aversion and how investor wealth moves between funds, and policy suggestions are
made based on those grounds.
2018-04-19 10:00:56
untagged
Business and Management not elsewhere classified