Optimal Dynamic Portfolio Choice with Multiple Decentralized Agents

This thesis consists of three essays in financial economics, more precisely in the field of asset pricing and optimal portfolio choice. The first essay studies the asset pricing implications of heterogeneity in preferences coupled with long run risk in a dynamic general equilibrium pure exchange economy. It is concerned with the understanding of how risk sharing among different types of agents affects the assets returns moments in equilibrium and moreover, how these agents reacts dynamically to the long run risk that they perceive. The second and third essay approach the question of optimal portfolio with stochastic opportunity sets. The second essay proposes an approximation methodology for deriving approximate closed form solutions of dynamic optimal portfolio allocation problems. The third essay examines the optimal consumption, portfolio rule and life insurance purchase problem of a wage earner having uncertain lifetime when the market price of risk follows a mean-reverting stochastic process.

Optimal consumption and portfolio choice with ambiguity and anticipation

Wealth Effect on Portfolio Allocation in Incomplete Markets

The question how to optimize consumption and portfolio choice over the life cycle has been widely discussed in the literature so far. In this paper we concentrate on a retiree's optimal consumption and portfolio selection over his remaining years of life. We apply the logistic model of mortality thus modeling the empirically observed increase of mortality during the retirement period. The optimal consumption strategy and portfolio choice are established by reducing the Hamilton-Jacobi-Bellmann equation to the explicit solution of an ordinary differential function (ODF) that includes the mortality rate. A general finding is that the Merton-Samuelson result of constant portfolio choice for a constant mortality is confirmed for arbitrary mortality. The portfolio choice is only influenced by risk and return of assets and the retirees’ risk aversion. To get the specific optimal consumption strategy in a realistic situation the logistic model of mortality has been fitted to the data of the Statistical Yearbook for the Federal Republic of Germany 2006/2008. The optimal initial value for the ODF is obtained by numerical methods. The solution provides a large increase in the ratio of optimal consumption to wealth up to about 92 years followed by a sharp decrease. A bequest motive dampens the magnitudes of the ups and downs of the consumption ratio but does not change the basic shape.

Beyond expected utility: Subjective risk aversion and optimal portfolio choice under convex shortfall risk measures

The problem of characterizing the least expensive bond portfolio that enables one to meet his/her liability to pay C dollars K years from now is dealt with in this article. Bond prices are allowed to be either overpriced or underpriced at the purchase time, while at the sale time the bonds are suppose to be fairly priced. Assuming shifts in spot rates to occur instantly after the acquisition of a bond portfolio Z and to follow fairly general type of behavior described by the condition (2), we give both necessary and sufficient conditions for Z to solve the immunization problem above. Our model is general enough to cover situations with twists in the yield curve. Making use of the K-T conditions, we explain in remark 7 why we focus on search of an optimal portfolio in the class of barbell strategies. Finally, by means of the K-T conditions we find an optimal bond portfolio which solves the immunization problem.

The effect of estimation risk on optimal portfolio choice

We study the Bellman equation associated with the optimal consumption and portfolio choice problem with stopping times in a complete market. We establish the existence of a strong solution by using the viscosity solutions technique. The optimal policy is shown to exist from the optimality conditions in the variational inequality.

Strategic Asset Allocation in Stochastic Environment and Incomplete Markets: Evidence on Horizon and Hedging Effects

International portfolio choice, liquidity constraints and the home equity bias puzzle

International Portfolio Choice, Liquidity Constraints and the Home Equity Bias Puzzle

ESG (Environmental, Social, and Governance) investments are becoming popular because they may provide competitive financial returns while promoting sustainable development. However, the uptake of ESG investments is limited due to barriers such as a lack of understanding and insufficient information. Indonesia has ESG-oriented indexes, such as SRI-KEHATI, ESG Leaders, ESG Sector Leaders IDX KEHATI, and ESG Quality 45 IDX KEHATI serve as a basis for ESG stock selection. This research uses the Markowitz model to optimize an ESG portfolio from four Indonesian green indices. The Markowitz model is employed to determine the optimal weights for establishing a portfolio on the efficient frontier. Using monthly adjusted closing prices from 2019 to 2024, the optimal portfolio suggested by four green indexes offers a balance of risk/return ratio. The optimal portfolio's performance comparison, which is measured by using the Treynor measure, Sharpe ratio, and Jensen's alpha is done to indicate which portfolio provides better risk-adjusted returns. The findings may provide optimal ESG portfolio choices to investor depending on their financial goals and risk tolerance. This research may also inspire other investors who have not yet invested in ESG companies to consider green investing, as ESG stocks provide investors with many benefits.

Mean-variance theory with imprecise accounting information

Climate Change and Long-Horizon Portfolio Choice: Combining Theory and Empirics

With the advent of the new technological era, the development of high-frequency datasets is easier Ihan
\never. It has allowed a wide range of empirical investigations regarding the financial markels to deepen
\nlhe understanding on several fields.ln this dissertatlon. lhree important issues, namely, the study ofthe
\nlead-Iag relationship, volatility transmission and oplimal portfolio choice, are addressed by considering
\nintraday data on a five-minute inlerval basis. Thus, the main purpose of this lhesis is lO provide new
\ninsights into the aforementioned aspects when high-frequency data are used in the analysis.