On loss‐avoiding payoff distribution in a dynamic portfolio management problem

Abstract

Purpose

The aim of this paper is to propose and analyse policies capable of generating left‐skewed pension distributions. Such policies can deliver large pension values with high probability and hence are of interest to practical fund managers.

Design/methodology/approach

The paper uses a computational method capable of solving stochastic optimal control problems. The optimal strategies obtained through the method are used to simulate dynamic portfolio management.

Findings

The paper finds that optimisation of locally non‐concave performance measures has produced left‐skewed payoff distributions of small VaR and CVaR. The distributions remain left‐skewed for relatively large values of the diffusion parameter.

Practical implications

On the basis of the findings, it would seem beneficial for real‐world fund managers to implement this kind of optimising “cautious‐relaxed” policy.

Originality/value

A novel non‐concave performance measure has been proposed in the paper to describe a portfolio manager's aim. The computed “cautious‐relaxed” policies have been shown to realise this aim.

Citation

Krawczyk, J.B. (2008), "On loss‐avoiding payoff distribution in a dynamic portfolio management problem", Journal of Risk Finance, Vol. 9 No. 2, pp. 151-172. https://doi.org/10.1108/15265940810853913