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Dec. 7 | Linking risk management under expected shortfall to loss-averse behavior





Zoom Conference ID: 647 178 489


An Chen, professor of School of Mathematics and Economics at Ulm University


We introduce and solve an optimal asset allocation problem under a weighted expected shortfall (WES) constraint, which contains the risk management problem under an expected shortfall constraint of \cite{BasakShapiro2001} as a special case. Furthermore, we link our risk management problem under the WES constraint with an optimal asset allocation with a multiple-reference-based preference (MRBP) and find that the optimal wealth with MRBP owns the same form as the optimal solution under the WES constraint. For the degenerate case with a fixed reference level, we are able to determine the critical maximal allowed expected shortfall constraint as a function of the loss aversion parameters to achieve equivalence. It is interesting to observe that, while no equivalence can be in general obtained between the WES and the MRBP solution, the optimal terminal wealth of the WES can be made to coincide with the MRBP terminal wealth in the most favorable and in the worst market states. In addition, we carry out a general equilibrium analysis in the presence of a WES/MRBP risk manager.

Brief introduction of the speaker:

Professor An Chen is a professor of the School of Mathematics and Economics at Ulm University and a supervisor of Ph.D. students. She is also the board member of German Society For Insurance and Financial Mathematics (DGVFM) and the co-editor of ASTIN-Bulletin - The Journal of the International Actuarial Association(IAA). Professor An Chen's research fields include Life and Pension Insurance, Optimal asset allocation, Risk Management in Finance and Insurance and Derivatives pricing. She has published more than 40 papers on European Journal of Operational Research, Journal of Economic Theory, Journal of Banking and Finance, Insurance: Mathematics and Economics and presided over several national-level funded research projects. Over the past over ten years, Professor An Chen has been working with great dedication. She concentrates on teaching students the methods of study, and she has cultivated a large number of professionals in the fields of insurance and actuarial accounting.