World Scientific Handbook in Financial Economics Series Vol. 4 HANDBOOK OF FINANCIAL. Editors. Leonard C MacLean

Transcription

1 World Scientific Handbook in Financial Economics Series Vol. 4 HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING on Editors Leonard C MacLean Dalhousie University, Canada (Emeritus) William T Ziemba University of British Columbia, Canada (Emeritus); ICMA Centre; University of Reading, UK; Visiting Professor at The Korean Advanced Institute for Science and Technology and Sabanci University, Istanbul World Scientific NEW JERSEY LONDON SINGAPORE BEIJING SHANGHAI HONG KONG TAIPEI CHENNAI

2 Preface About the Editors List of Contributors Acknowledgments vii xvii xix xxi Part I: Decision Making Under Uncertainty 1 Section A. Arbitrage and Asset Pricing 3 1. Ross, SA (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13(3) Schachermayer, W (2010a). The fundamental theorem of asset pricing. In R Cont (Ed.), Encyclopedia of Quantitative Finance, 2, New York: Wiley Schachermayer, W (2010b). Risk neutral pricing. In R Cont (Ed.), Encyclopedia of Quantitative Finance, 4, New York: Wiley Kallio, M and WT Ziemba (2007). Using Tucker's theorem of the alternative to provide a framework for proving basic arbitrage results. Journal of Banking and Finance, 31, Section B. Utility Theory Fishburn, P (1969). A general theory of subjective probabilities and expected utilities. Annals of Mathematical Statistics, 40(4), Kahneman, D and A Tversky (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 47(2), Levy, M and H Levy (2002). Prospect theory: Much ado about nothing? Management Science, 48(10), Wakker, PP (2003). The data of Levy and Levy (2002) "Prospect theory: Much ado about nothing?" Actually support prospect theory. Management Science, 49(7), xiii

3 xiv 9. Levy. M and H Levy (2004). Prospect theory and mean-variance analysis. Review of Financial Studies, 17(4) Baltussen, G, T Post and PV Vliet (2006). Violations of cumulative prospect theory in mixed gambles with moderate probabilities. Management Science, 52(8), Kreps, DM and EL Porteus (1979). Temporal von Neumann-Morgenstern and induced preferences. Journal of Economic Theory, 20(1), 'Epstein. LG and SE Zin (1989). Substitution, risk aversion >- and the temporal behavior of consumption and asset returns: A theoretical framework. Econometrica, 57(4), Rabin, M (2000). Risk aversion and expected-utility theory: A calibration theorem. Econometrica, 68(5), Machina. M (2004). Non-expected utility theory. In JL Teugels and B Sundt (Eds.), Encyclopedia of Actuarial Science, 2, New York: Wiley Tversky, A and D Kahneman (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), Kahneman, D and A Tversky (1984). Choices, values, and frames. American Psychologist. 39(4), Section C. Stochastic Dominance Hanoch, G and H Levy (1969). The efficiency analysis of choices involving risk. Review of Economic Studies, 36(3), Levy, H (1973). Stochastic dominance, efficiency criteria, and efficient portfolios: The multi-period case. American Economic Review, 63(5), Section D. Risk Aversion and Static Portfolio Theory Pratt, JW (1964). Risk aversion in the small and in the large. Econometrica, 32(1-2), Li, Y and WT Ziemba (1993). Univariate and multivariate measures of risk aversion and risk premiums. Annals of Operations Research, 45, Chopra, VK and WT Ziemba (1993). The effect of errors in means, variances, and co-variances on optimal portfolio choice. Journal of Portfolio Management, 19,

4 22. Ziemba. WT, C Parkan and R Brooks-Hill (1974). Calculation of investment portfolios with risk free borrowing and lending. Management Science. 21(2), Kallberg, JG and WT Ziemba (1983). Comparison of alternative utility functions in portfolio selection problems. Management Science, 29(11), Li, Y and WT Ziemba (1989). Characterizations of optimal portfolios by univariate and multivariate risk aversion. Management Science. 35(3), Ziemba, WT (1975). Choosing investment portfolios when the returns have stable distributions. In WT Ziemba and RG Vickson (Eds.), Stochastic Optimization Models in Finance, San Diego: Academic Press. 26. MacLean, LC, ME Foster and WT Ziemba (2007). Covariance complexity and rates of return on assets. Journal of Banking and Finance, 31(11), Rabin, M and RH Thaler (2001). Anomalies: Risk aversion. Journal of Economic Perspectives, 15(1), xv Part II: From Decision Making to Measurement and Dynamic Modeling Section E. Risk Measures 28. Geyer, A and WT Ziemba (2008). The innovest'austrian pension fund planning model InnoALM. Operations Research, 56(4), Rockafellar, RT and WT Ziemba (2000). Modified risk measures and acceptance sets. 30. Follmer, H and T Knispel (2012). Convex risk measures: Basic facts, law-invariance and beyond, asymptotics for large portfolios. 31. Krokhmal. P, M Zabarankin and S Uryasev (2011). Modeling and optimization of risk. Surveys in Operations Research and Management Science, 16(2), Section F. Dynamic Portfolio Theory and Asset Allocation 32. Edirisinghe, C, X Zhang and S-C Shyi (2012). DEA-based firm strengths and market efficiency in US and Japan

5 33. MacLean, LC and WT Ziemba (2012). The Kelly strategy for investing: Risk and reward Browne. S (1999a). Reaching goals by'a deadline: Digital options and continuous-time active portfolio management. Advances in Applied Probability, 31, Browne. S (1999b). Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark. Finance and Stochastics, 3, ;.fe» 4 ' 36. Browne. S (2000). Stochastic differential portfolio games. Journal of Applied Probability, 37(1) Davis. M. and S Lleo (2012). Fractional Kelly strategies in continuous time: Recent developments Bahsoun, W, IV Evstigneev and MI Taksar (2012). Growth-optimal investments and numeraire portfolios under transactions costs Campbell, JY, YL Chan and LM Viceira (2003). A multivariate model of strategic asset allocation. Journal of Financial Economics, 67, Thorp, EO, and Mizusawa, S (2012). Maximizing capital growth with black swan protection. 849 Author Index 873 Subject Index

6 World Scientific Handbook in Financial Economics Series Vol. 4 HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING E Editors Leonard C Mac Lean Dalhousie University, Canada (Emeritus) William T Ziemba University of British Columbia, Canada (Emeritus); ICMA Centre; University of Reading, UK; Visiting Professor at The Korean Advanced Institute for Science and Technology and Sabanci University, Istanbul World Scientific NEW JERSEY LONDON SINGAPORE BEIJING SHANGHAI HONG KONG TAIPEI CHENNAI

7 Preface About the Editors List of Contributors Acknowledgments vii xvii xix xxi Part I: Decision Making Under Uncertainty 1 Section A. Arbitrage and Asset Pricing 3 1. Ross, SA (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13(3), Schachermayer, W (2010a). The fundamental theorem of asset pricing. In R Cont (Ed.), Encyclopedia of Quantitative Finance, 2, New York: Wiley Schachermayer, W (2010b). Risk neutral pricing. In R Cont (Ed.), Encyclopedia of Quantitative Finance, 4, New York: Wiley Kallio, M and WT Ziemba (2007). Using Tucker's theorem of the alternative to provide a framework for proving basic arbitrage results. Journal of Banking and Finance, 31, Section B. Utility Theory Fishburn, P (1969). A general theory of subjective probabilities and expected utilities. Annals of Mathematical Statistics, 40(4) Kahneman, D and A Tversky (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 47(2), Levy, M and H Levy (2002). Prospect theory: Much ado about nothing? Management Science, 48(10), Wakker, PP (2003). The data of Levy and Levy (2002) "Prospect theory: Much ado about nothing?" Actually support prospect theory. Management Science, 49(7), xm

8 9. Levy. M and H Levy (2004). Prospect theory and mean-variance analysis. Review of Financial Studies, 17(4) Baltussen, G, T Post and PV Vliet (2006). Violations of cumulative prospect theory in mixed gambles with moderate probabilities. Management Science, 52(8), Kreps, DM and EL Porteus (1979). Temporal von Neumann-Morgenstern and induced preferences. Journal of Economic Theory, 20(1), Epstein. LG and SE Zin (1989). Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework. Econometrica, 57(4), Rabin, M (2000). Risk aversion and expected-utility theory: A calibration theorem. Econometrica, 68(5), Machina, M (2004). Non-expected utility theory. In JL Teugels and B Sundt (Eds.), Encyclopedia of Actuarial Science, 2, New York: Wiley Tversky, A and D Kahneman (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), Kahneman, D and A Tversky (1984). Choices, values, and frames. American Psychologist, 39(4), Section C. Stochastic Dominance Hanoch, G and H Levy (1969). The efficiency analysis of choices involving risk. Review of Economic Studies, 36(3), Levy, H (1973). Stochastic dominance, efficiency criteria, and efficient portfolios: The multi-period case. American Economic Review, 63(5'), Section D. Risk Aversion and Static Portfolio Theory Pratt, JW (1964). Risk aversion in the small and in the large. Econometrica, 32(1-2), Li, Y and WT Ziemba (1993). Univariate and multivariate measures of risk aversion and risk premiums. Annals of Operations Research, 45, Chopra, VK and WT Ziemba (1993). The effect of errors in means, variances, and co-variances on optimal portfolio choice. Journal of Portfolio Management, 19,

9 xv 22. Ziemba, WT, C Parkan and R Brooks-Hill (1974). Calculation of investment portfolios with risk free borrowing and lending. Management Science. 21(2), Kallberg. JG and WT Ziemba (1983). Comparison of alternative utility functions in portfolio selection problems. Management Science, 29(11), Li, Y and WT Ziemba (1989). Characterizations of optimal portfolios by univariate and multivariate risk aversion. Management Science, 35(3), Ziemba, WT (1975). Choosing investment portfolios when the returns have stable distributions. In WT Ziemba and RG Vicksori (Eds.), Stochastic Optimization Models in Finance, San Diego: Academic Press MacLean, LC, ME Foster and WT Ziemba (2007). Covariance complexity and rates of return on assets. Journal of Banking and Finance, 31(11), Rabin, M and RH Thaler (2001). Anomalies: Risk aversion. Journal of Economic Perspectives, 15(1), Part II: From Decision Making to Measurement and Dynamic Modeling 481 Section E. Risk Measures Geyer, A and WT Ziemba (2008). The innovest Austrian pension fund planning model InnoALM. Operations Research, 56(4), Rockafellar, RT and WT Ziemba (2000). Modified risk measures and acceptance sets Follmer, H and T Knispel (2012). Convex risk measures: Basic facts, law-invariance and beyond, asyrnptotics for large portfolios Krokhmal, P, M Zabarankin and S Uryasev (2011). Modeling and optimization of risk. Surveys in Operations Research and Management Science, 16(2), Section F. Dynamic Portfolio Theory and Asset Allocation Edirisinghe, C, X Zhang and S-C Shyi (2012). DEA-based firm strengths and market efficiency in US and Japan. 611

10 33. MacLean. LC and WT Ziemba (2012). The Kelly strategy for investing: Risk and reward. 34. Browne. S (1999a). Reaching goals by'a deadline: Digital options and continuous-time active portfolio management. Advances in Applied Probability, Browne, S (1999b). Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark. Finance and Stochastics, 3, Browne. S (2000). Stochastic differential portfolio games. Journal of Applied Probability, 37(1) Davis. M, and S Lleo (2012). Fractional Kelly strategies in continuous time: Recent developments. 38. Bahsoun. W, IV Evstigneev and MI Taksar (2012). Growth-optimal investments and numeraire portfolios under transactions costs. 39. Campbell. JY, YL Chan and LM Viceira (2003). A multivariate model of strategic asset allocation. Journal of Financial Economics, Thorp. EO, and Mizusawa, S (2012). Maximizing capital growth with black swan protection. Author Index Subject Index