Abstract
This paper introduces optimal expected utility (OEU) risk measures, investigates their main properties and puts them in perspective to alternative risk measures and notions of certainty equivalents. By taking the investor’s point of view, OEU maximizes the sum of capital available today and the certainty equivalent of capital in the future. To the best of our knowledge, OEU is the only existing utility-based risk measure that is (non-trivial and) coherent if the utility function u has constant relative risk aversion. We present several different risk measures that can be derived with special choices of u and illustrate that OEU is more sensitive than value at risk and average value at risk with respect to changes of the probability of a financial loss.
Funding statement: Sebastian Geissel gratefully acknowledges financial support by Stiftung der Deutschen Wirtschaft (SDW).
References
[1] C. Acerbi and D. Tasche, On the coherence of expected shortfall, J. Bank. Finance 26 (2002), no. 7, 1487–1503. 10.1016/S0378-4266(02)00283-2Suche in Google Scholar
[2] K. J. Arrow, Essays in the Theory of Risk-Bearing, 3rd ed., Markham, Chicago, 1971. Suche in Google Scholar
[3] P. Artzner, F. Delbaen, J.-M. Eber and D. Heath, Thinking coherently, Risk Mag. 10 (1997), no. 11, 68–72. Suche in Google Scholar
[4] P. Artzner, F. Delbaen, J.-M. Eber and D. Heath, Coherent measures of risk, Math. Finance 9 (1999), no. 3, 203–228. 10.1111/1467-9965.00068Suche in Google Scholar
[5] P. Barrieu and N. E. Karoui, Pricing, hedging and optimally designing derivatives via minimization of risk measures, Indifference Pricing: Theory and Applications, Princeton University Press, Princeton (2008), 77–146. 10.1515/9781400833115.77Suche in Google Scholar
[6] H. H. Bauschke and P. L. Combettes, Convex Analysis and Monotone Operator Theory in Hilbert Spaces, Springer, New York, 2011. 10.1007/978-1-4419-9467-7Suche in Google Scholar
[7] F. Bellini, B. Klar, A. Müller and E. R. Gianin, Generalized quantiles as risk measures, Insurance Math. Econom. 54 (2014), 41–48. 10.1016/j.insmatheco.2013.10.015Suche in Google Scholar
[8] A. Ben-Tal and M. Teboulle, Expected utility, penalty functions and duality in stochastic nonlinear programming, Manag. Sci. 32 (1986), no. 11, 1445–1466. 10.1287/mnsc.32.11.1445Suche in Google Scholar
[9] A. Ben-Tal and M. Teboulle, An old-new concept of convex risk measures: The optimized certainty equivalent, Math. Finance 17 (2007), no. 3, 449–476. 10.1111/j.1467-9965.2007.00311.xSuche in Google Scholar
[10] P.-A. Chiappori and M. Paiella, Relative risk aversion is constant: Evidence from panel data, J. Eur. Econ. Assoc. 9 (2011), no. 6, 1021–1052. 10.1111/j.1542-4774.2011.01046.xSuche in Google Scholar
[11] B. de Finetti, Sul Concetto di Media, Giorn. Ist. Ital. Attuari 2 (1931), 369–396. Suche in Google Scholar
[12] F. Delbaen, Coherent Risk Measures, Scuola Normale Superiore, Pisa, 2000. Suche in Google Scholar
[13] F. Delbaen, Coherent risk measures on general probability spaces, Advances in Finance and Stochastics, Springer, Berlin (2002) 1–37. 10.1007/978-3-662-04790-3_1Suche in Google Scholar
[14] K. Detlefsen and G. Scandolo, Conditional and dynamic convex risk measures, Finance Stoch. 9 (2005), no. 4, 539–561. 10.1007/s00780-005-0159-6Suche in Google Scholar
[15] H. Fink, S. Geissel, J. Sass and F. T. Seifried, Implied risk aversion: An alternative rating system for retail structured products, preprint (2017), http://ssrn.com/abstract=2651135. Suche in Google Scholar
[16] P. C. Fishburn, Utility Theory for Decision Making, Wiley, New York, 1970. 10.21236/AD0708563Suche in Google Scholar
[17] P. C. Fishburn, Nonlinear Preference and Utility Theory, Johns Hopkins University Press, Baltimore, 1988. Suche in Google Scholar
[18] H. Föllmer and T. Knispel, Entropic risk measures: Coherence vs. convexity, model ambiguity, and robust large deviations, Stoch. Dyn. 11 (2011), no. 2–3, 333–351. 10.1142/S0219493711003334Suche in Google Scholar
[19] H. Föllmer and A. Schied, Convex measures of risk and trading constraints, Finance Stoch. 6 (2002), no. 4, 429–447. 10.1007/s007800200072Suche in Google Scholar
[20] H. Föllmer and A. Schied, Stochastic Finance, 3rd ed., De Gruyter, Berlin, 2011. 10.1515/9783110218053Suche in Google Scholar
[21] I. Friend and M. E. Blume, The demand for risky assets, Amer. Econ. Rev. 65 (1975), no. 5, 900–922. 10.1016/B978-0-12-445850-5.50008-8Suche in Google Scholar
[22] M. Fritelli and E. Rosazza Gianin, Putting order in risk measures, J. Bank. Finance 26 (2002), no. 7, 1473–1486. 10.1016/S0378-4266(02)00270-4Suche in Google Scholar
[23] S. Geissel, Utility-Based Risk Measures and Time Consistency of Dynamic Risk Measures, Dissertation, TU Kaiserslautern, 2015. Suche in Google Scholar
[24] K. Giesecke, T. Schmidt and S. Weber, Measuring the risk of large losses, J. Investment Manag. 6 (2008), no. 4, 1–15. Suche in Google Scholar
[25] C. Gollier, The Economics of Risk and Time, MIT Press, Cambridge, 2001. 10.7551/mitpress/2622.001.0001Suche in Google Scholar
[26] D. Heath, Back to the future, Plenary lecture at the First World Congress of the Bachelier Society, 2000. 10.7748/eldc.9.1.41.s36Suche in Google Scholar PubMed
[27] D. Heath and H. Ku, Pareto equilibria with coherent measures of risk, Math. Finance 14 (2004), no. 2, 163–172. 10.1111/j.0960-1627.2004.00187.xSuche in Google Scholar
[28] E. Jouini, W. Schachermayer and N. Touzi, Law invariant risk measures have the Fatou property, Advances in Mathematical Economics, Springer, Tokyo (2006), 49–71. 10.1007/4-431-34342-3_4Suche in Google Scholar
[29] M. S. Kimball, Precautionary saving in the small and in the large, Econometrica 58 (1990), no. 1, 53–73. 10.2307/2938334Suche in Google Scholar
[30] M. S. Kimball, Standard risk aversion, Econometrica 61 (1993), no. 3, 589–611. 10.2307/2951719Suche in Google Scholar
[31] P. A. Krokhmal, Higher moment coherent risk measures, Quant. Finance 7 (2007), no. 4, 373–387. 10.1080/14697680701458307Suche in Google Scholar
[32] A. Mas-Colell, M. D. Whinston and J. R. Green, Microeconomic Theory, Oxford University Press, Oxford, 1995. Suche in Google Scholar
[33] D. J. Meyer and J. Meyer, Relative risk aversion: What do we know?, J. Risk Uncertain. 31 (2005), no. 3, 243–262. 10.1007/s11166-005-5102-xSuche in Google Scholar
[34] A. Müller, Certainty equivalents as risk measures, Braz. J. Probab. Stat. 21 (2007), no. 1, 1–12. Suche in Google Scholar
[35] M. Nagumo, Über eine Klasse der Mittelwerte, Jpn. J. Math. 7 (1930), 71–79. 10.4099/jjm1924.7.0_71Suche in Google Scholar
[36] J. W. Pratt, Risk aversion in the small and in the large, Econometrica 32 (1964), no. 1–2, 122–136. 10.2307/1913738Suche in Google Scholar
[37] R. T. Rockafellar and S. Uryasev, Optimization of conditional value-at-risk, J. Risk 2 (2000), no. 3, 21–41. 10.21314/JOR.2000.038Suche in Google Scholar
[38] R. T. Rockafellar and S. Uryasev, Conditional value-at-risk for general loss distributions, J. Bank. Finance 26 (2002), no. 7, 1443–1471. 10.1016/S0378-4266(02)00271-6Suche in Google Scholar
[39] G. G. Szpiro, Measuring risk aversion: An alternative approach, Rev. Econ. Stat. 68 (1986), 156–159. 10.2307/1924939Suche in Google Scholar
[40] A. Vinel and P. A. Krokhmal, Certainty equivalent measures of risk, Ann. Oper. Res. 249 (2017), no. 1–2, 75–95. 10.1007/s10479-015-1801-0Suche in Google Scholar
[41] J. von Neumann and O. Morgenstern, Theory of Games and Economic Behavior, 2nd ed., Princeton University Press, Princeton, 1947. Suche in Google Scholar
[42] S. Weber, Distribution-invariant risk measures, information, and dynamic consistency, Math. Finance 16 (2006), no. 2, 419–441. 10.1111/j.1467-9965.2006.00277.xSuche in Google Scholar
© 2017 Walter de Gruyter GmbH, Berlin/Boston
Artikel in diesem Heft
- Frontmatter
- Portfolio optimization under dynamic risk constraints: Continuous vs. discrete time trading
- On risk measuring in the variance-gamma model
- Distortion risk measures, ROC curves, and distortion divergence
- EM algorithm for Markov chains observed via Gaussian noise and point process information: Theory and case studies
- Optimal expected utility risk measures
Artikel in diesem Heft
- Frontmatter
- Portfolio optimization under dynamic risk constraints: Continuous vs. discrete time trading
- On risk measuring in the variance-gamma model
- Distortion risk measures, ROC curves, and distortion divergence
- EM algorithm for Markov chains observed via Gaussian noise and point process information: Theory and case studies
- Optimal expected utility risk measures