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

Giorgio Consigli, Asmerilda Hitaj () and Elisa Mastrogiacomo
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Giorgio Consigli: University of Bergamo
Asmerilda Hitaj: University of Pavia
Elisa Mastrogiacomo: Insubria University

Computational Management Science, 2019, vol. 16, issue 1, No 7, 129-154

Abstract: 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 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10287-018-0333-x

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