This proposal puts forth a methodology that can be used to derive optimal asset allocations for general forms of Loss Aversion, explicitly accounting for the real risks associated with large-scale investments. The portfolio problem is solved by a stochastic algorithm based on Particle Swarm Optimization, which permits the inclusion of transaction costs and other constraints faced by investors and fund managers. An empirical study compares the proposed approach to traditional strategies in terms of portfolio composition, downside protection in adverse market conditions and global performance.
Avellone, A., Fiori, A., Foroni, I. (2021). Portfolio Optimization with Nonlinear Loss Aversion and Transaction Costs. In M. Corazza, M. Gilli, C. Perna, C. Pizzi, M. Sibillo (a cura di), Mathematical and Statistical Methods for Actuarial Sciences and Finance (pp. 51-56). Springer [10.1007/978-3-030-78965-7_9].
Portfolio Optimization with Nonlinear Loss Aversion and Transaction Costs
Avellone A.;Fiori A. M.
;Foroni I.
2021
Abstract
This proposal puts forth a methodology that can be used to derive optimal asset allocations for general forms of Loss Aversion, explicitly accounting for the real risks associated with large-scale investments. The portfolio problem is solved by a stochastic algorithm based on Particle Swarm Optimization, which permits the inclusion of transaction costs and other constraints faced by investors and fund managers. An empirical study compares the proposed approach to traditional strategies in terms of portfolio composition, downside protection in adverse market conditions and global performance.
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