Portfolio Choice Under Cumulative Prospect Theory: Sensitivity Analysis and an Empirical Study

Posted: 25 Apr 2015

See all articles by Asmerilda Hitaj

Asmerilda Hitaj

Università degli Studi di Milano-Bicocca - Dipartimento di Statistica e Metodi Quantitativi

Elisa Mastrogiacomo

University of Insubria

Multiple version iconThere are 2 versions of this paper

Date Written: April 23, 2015

Abstract

In this paper we study the portfolio selection problem under cumulative prospect theory (CPT), both from a theoretical and empirical point of view. Our aim is twofold. First, we study through a simulation-based procedure, the implication of higher-moments and CPT parameters on Mean/Risk efficient frontier. In this part, motivated by recent results, we assume a multivariate variance gamma (MVG) distribution for log-returns. On a second stage, we investigate empirically, for a hedge fund portfolio, the optimal choice problem for an investor who behaves according to the CPT. We construct several optimal CPT portfolios by considering different parameters for the CPT utility function. We then compare our empirical results with the Mean Variance (MV) and the Global Minimum Variance (GMV) portfolios, from an in-sample and out-of-sample perspective.

Keywords: Finance, Investment analysis, Robustness and sensitivity analysis, Scenarios, Utility theory.

Suggested Citation

Hitaj, Asmerilda and Mastrogiacomo, Elisa, Portfolio Choice Under Cumulative Prospect Theory: Sensitivity Analysis and an Empirical Study (April 23, 2015). Available at SSRN: https://ssrn.com/abstract=2598186 or http://dx.doi.org/10.2139/ssrn.2598186

Asmerilda Hitaj

Università degli Studi di Milano-Bicocca - Dipartimento di Statistica e Metodi Quantitativi ( email )

Milano, 20126
Italy

Elisa Mastrogiacomo (Contact Author)

University of Insubria ( email )

Via Ravasi 2
Varese, 21100 21100
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
499
PlumX Metrics