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Optimal portfolios under the threat of a crash

  • We consider the determination of optimal portfolios under the threat of a crash. Our main assumption is that upper bounds for both the crash size and the number of crashes occurring before the time horizon are given. We make no probabilistic assumption on the crash size or the crash time distribution. The optimal strategies in the presence of a crash possibility are characterized by a balance problem between insurance against the crash and good performance in the crash-free situation. Explicit solutions for the log-utility case are given. Our main finding is that constant portfolios are no longer optimal ones.

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Author:Ralf Korn, Paul Wilmott
URN (permanent link):urn:nbn:de:hbz:386-kluedo-10612
Serie (Series number):Report in Wirtschaftsmathematik (WIMA Report) (64)
Document Type:Preprint
Language of publication:English
Year of Completion:2000
Year of Publication:2000
Publishing Institute:Technische Universität Kaiserslautern
Date of the Publication (Server):2000/08/28
Tag:Optimal portfolios; crash modelling; equilibrium strategies; log-utility; worst-case scenario
Faculties / Organisational entities:Fachbereich Mathematik
DDC-Cassification:5 Naturwissenschaften und Mathematik / 510 Mathematik
Licence (German):Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011