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Portfolio choice under cumulative prospect theory: sensitivity analysis and an empirical study

  • Giorgio Consigli
  • Asmerilda Hitaj
  • Elisa Mastrogiacomo
Original Paper
  • 37 Downloads

Abstract

A sensitivity analysis of the impact of cumulative prospect theory (CPT) parameters on a Mean/Risk efficient frontier is performed through a simulation procedure, assuming a Multivariate Variance Gamma distribution for log-returns. The optimal investment problem for an agent with CPT preferences is then investigated empirically, by considering different parameters’ combinations for the CPT utility function. Three different portfolios, one hedge fund and two equity portfolios are considered in this study, where the Modified Herfindahl index is used as a measure of portfolio diversification, while the Omega ratio and the Information ratio are used as measures of performance.

Keywords

Cumulative prospect theory Non-convex optimization Robustness and sensitivity analysis Hedge funds 

Notes

Acknowledgements

The authors would like to thank the Editor and the anonymous Referees for their helpful comments. All remaining errors are responsibility of the authors. Asmerilda Hitaj and Elisa Mastrogiacomo want to acknowledge GNAPMA for the financial support of the project ’Levy processes, stochastic control and portfolio optimization’.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Management, Economics and Quantitative MethodsUniversity of BergamoBergamoItaly
  2. 2.Department of Economics and ManagementUniversity of PaviaPaviaItaly
  3. 3.Department of EconomicsInsubria UniversityVareseItaly

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