Danielsson, Jon 
ORCID: 0009-0006-9844-7960, Jorgensen, Bjorn N., Vries, Casper G. and Yang, Xiaoguang
(2008)
Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation.
Annals of Finance, 4 (3).
pp. 345-367.
ISSN 1614-2446
Abstract
We characterize the investor’s optimal portfolio allocation subject to a budget constraint and a probabilistic VaR constraint in complete markets environments with a finite number of states. The set of feasible portfolios might no longer be connected or convex, while the number of local optima increases exponentially with the number of states, implying computational complexity. The optimal constrained portfolio allocation may therefore not be monotonic in the state–price density. We propose a type of financial innovation, which splits states of nature, that is shown to weakly enhance welfare, restore monotonicity of the optimal portfolio allocation in the state-price density, and reduce computational complexity.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.springer.com/business+%26+management/fi... |
| Additional Information: | © 2008 Springer |
| Divisions: | Finance Financial Markets Group |
| Subjects: | H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions |
| Date Deposited: | 09 Aug 2011 13:56 |
| Last Modified: | 01 Oct 2024 03:03 |
| URI: | http://eprints.lse.ac.uk/id/eprint/37789 |
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