Determination and estimation of risk aversion coefficients
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Date
2018-05
Journal Title
Journal ISSN
Volume Title
Publisher
Springer-Verlag GmbH
Abstract
In the paper we consider two types of utility functions often used in portfolio allocation problems, i.e. the exponential utility and the quadratic utility. We link the
resulting optimal portfolios obtained by maximizing these utility functions to the corresponding optimal portfolios based on the minimum value-at-risk (VaR) approach.
This allows us to provide analytic expressions for the risk aversion coefficients as
functions of the VaR level. The results are initially derived under the assumption that
the vector of asset returns is multivariate normally distributed and they are generalized to the class of elliptically contoured distributions thereafter. We find that the
choice of the coefficients of risk aversion depends on the stochastic model used for the
data generating process. Finally, we take the parameter uncertainty into account and
present confidence intervals for the risk aversion coefficients of the considered utility
functions. The theoretical results are validated in an empirical study.
Description
Keywords
Risk aversion, Exponential utility, Quadratic utility, Elliptically contoured distributions, Laplace distribution, Parameter uncertainty
Citation
Determination and estimation of risk aversion coefficients / Taras Bodnar, Yarema Okhrin, Valdemar Vitlinskyy, Taras Zabolotskyy // Computational Management Science. – 2018. – № 15. – 297–317.