Portfolio choice and optimal hedging with general risk functions: A simplex-like algorithm |
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Authors: | Alejandro Balbás Raquel Balbás Silvia Mayoral |
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Institution: | 1. Universidad Carlos III, CL, Madrid 126, 28903 Getafe, Madrid, Spain;2. Universidad Autónoma de Madrid, Av Tomás y Valiente, 5, 28049 Madrid, Spain;3. Universidad de Navarra, Edificio Bibliotecas, 31080 Pamplona, Navarra, Spain |
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Abstract: | The minimization of general risk functions is becoming more and more important in portfolio choice theory and optimal hedging. There are two major reasons. Firstly, heavy tails and the lack of symmetry in the returns of many assets provokes that the classical optimization of the standard deviation may lead to dominated strategies, from the point of view of the second order stochastic dominance. Secondly, but not less important, many institutional investors must respect legal capital requirements, which may be more easily studied if one deals with a risk measure related to capital losses. |
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Keywords: | Risk measure Deviation measure Portfolio selection Infinite-dimensional linear programming Simplex-like method |
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