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Recursive risk measures under regime switching applied to portfolio selection
Authors:Zhiping Chen  Jia Liu  Yongchang Hui
Institution:Department of Computing Science, School of Mathematics and Statistics, Xi’an Jiaotong University, Xi’an, P.R. China.
Abstract:In this paper, we define the conditional risk measure under regime switching and derive a class of time consistent multi-period risk measures. To do so, we describe the information process with regime switching in a product space associated with the product of two filtrations. Moreover, we show how to establish the corresponding multi-stage portfolio selection models using the time consistent multi-period risk measure for medium-term or long-term investments. Take the conditional value-at-risk measure as an example, we demonstrate the resulting multi-stage portfolio selection problem can be transformed into a second-order cone programming problem. Finally, we carry out a series of empirical tests to illustrate the superior performance of the proposed random framework and the corresponding multi-stage portfolio selection model.
Keywords:Time consistency  Recursive risk measure  Regime switching  Dynamic portfolio selection  Conditional value-at-risk  Factor model
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