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In this paper, we study a robust, dynamic, continuous-time optimal consumption and portfolio allocation problem for investors with recursive preferences who have access to both stock and derivatives markets. We assume the stock price process follows a stochastic volatility model, with instantaneous precision as the unique state variable, allowing for discontinuities in all the dynamics. We obtain a closed-form approximate solution up to a system of ODEs to the optimization problem for a non-unitary value of the elasticity of intertemporal substitution of consumption, being able to derive an exact solution as a particular case. Our theoretical findings show that the optimal policies are remarkably affected by the ambiguity-aversion parameters to diffusive and jump risks. A detailed numerical analysis confirms the effectiveness of our theoretical results on real data. Finally, we prove that investors who do not believe in ambiguity may suffer considerable wealth losses. [ABSTRACT FROM AUTHOR]

This special issue of Business Systems Research (SI of the BSR) is being co-published by the Slovenian Society INFORMATIKA – Section for Operational Research (SSI -SOR). It focuses on recent advances in Operations Research and Management Science (OR / MS), with a particular emphasis on linking OR / MS with other areas of quantitative and qualitative methods in the context of a multidisciplinary framework. The ten papers that were chosen for this Special Issue of the BSR present advancements and new techniques (methodology) in the field of Operations Research (OR), as well as their application in a variety of fields, including risk management, mathematical programming, game theory, gravity, spatial analysis, logistics, circular economy, continuous improvement, sustainability, e-commerce, forecasting, Gaussian processes, linear regression, multi-layer perceptron, and machine learning.

We refer to the discrete-time market model under ambiguity introduced in [Cinfrignini, A., Petturiti, D. and Vantaggi, B., Dynamic bid–ask pricing under Dempster-Shafer uncertainty. J. Math. Econ., 2023a, 107, 102871], formed by a frictionless risk-free bond and a non-dividend paying stock with bid-ask spread. For a European derivative, we generalize the classical binomial pricing formula by allowing for bid-ask prices and investigate the properties of the ensuing replicating strategies. Next, for an American derivative, we propose a backward bid-ask pricing procedure and prove that the resulting discounted price processes are the bid-ask Choquet-Snell envelopes of the discounted payoff process, respectively. Moreover, for an American call option, we prove a generalization of the well-known Merton's theorem [Merton, R.C., Theory of rational option pricing. Bell J. Econ. Manage. Sci., 1973, 4, 141–183] holding for both the bid and the ask price processes. Finally, we introduce a market consistent calibration procedure and show the use of the calibrated model in bid-ask option pricing. [ABSTRACT FROM AUTHOR]

Compared with the extensive empirical literature on contrarian strategy, we develop a dynamic mean-variance model with geometric value-reversion asset prices, which implies a contrarian strategy. The model is solved (semi) explicitly under three asset price evaluations: constant valuation, exponential-varying valuation, and geometric average valuation. From a mathematical perspective, it is nontrivial to solve the extended HJB equations under stochastic opportunities. We demonstrate that our strategy exhibits the same monotonicity as that of the traditional constant relative risk-averse utility, and the welfare loss of using the dynamic mean-variance criterion is rather small, supporting that our model is a good approximation to the constant relative risk-averse utility. Empirical tests show that our strategies can help an investor achieve a less volatile wealth trajectory. [ABSTRACT FROM AUTHOR]

One-criterion decision making under uncertainty (1-DM/U) is related to situations in which the decision maker (DM) evaluates the alternatives on the basis of one objective, but e.g. due to numerous uncertain future factors some parameters of the problem are not deterministic. Instead of entirely known paramaters, a set of possible scenarios is available. Multi-criteria decision making under certainty (M-DM/C) concerns cases where the DM assesses particular options in terms of many objectives. The parameters are known. Therefore, scenario planning is redundant. Both issues are investigated by many researchers and practitioners, since real economic decision problems are usually at least uncertain or multi-objective. In the paper, numerous analogies between 1-DM/U and M-DM/C are revealed. Some of them have existed for many decades, but others, so far, have not been developed. A careful examination of all the similarities enables an improvement of existing methods and a formulation of new algorithms for 1-DM/U and M-DM/C. The article presents six pairs of similar procedures and contains the description of three novel approaches created by analogy to existing ones.

This article highlights the application of the Preference Ranking Organization Method for Enrichment of Evaluations (PROMETHEE) I and II in selecting the best laptop model among six different available models in the market. Seven important criteria, that is, processor, hard disk capacity, operating system, RAM, screen size, brand, and color, are selected, based on which the selection process have been made. Analytic hierarchy process (AHP) is adopted for calculating the weightages of the seven criteria and PROMETHEE is applied to select the best alternative. PROMETHEE I provides the partial ranking and preferences of one model over another, whereas PROMETHEE II provides the complete ranking of the alternatives. From this analysis, Model 4 is coming out to be the best laptop model occupying the first position and Model 1 occupies the last position, thus indicating it as the worst model among the group. The objectives of this article are to select the best laptop model among six available alternatives and to understood the steps of both multiple criteria decision-making (MCDM) methodologies, that is, PROMETHEE and AHP, in details.

We study how changes to the informativeness of signals in Bayesian games and single‐agent decision problems affect the distribution of equilibrium actions. Focusing on supermodular environments, we provide conditions under which a more precise private signal for one agent leads to an increasing‐mean spread or a decreasing‐mean spread of equilibrium actions for all agents. We apply our comparative statics to information disclosure games between a sender and many receivers and derive sufficient conditions on the primitive payoffs that lead to extremal disclosure of information. [ABSTRACT FROM AUTHOR]

Defined contribution (DC) pension plans have been gaining ground in the last 10–20 years as the preferred system for many countries and other agencies, both private and public. The central question for a DC plan is how to invest in order to reach the participant's retirement goals. Given the financial illiteracy of the general population, it is common to offer a default policy for members who do not actively make investment choices. Using data from the Chilean system, we discuss an investment model with fixed contribution rates and compare the results with the existing default policy under multiple objectives. Our results indicate that the Chilean default policy has good overall performance, but specific closed-loop policies have a higher probability of achieving desired retirement goals and can reduce the expected shortfall at retirement. [ABSTRACT FROM AUTHOR]

In this paper, we consider an optimal insurance problem from the perspective of a risk-averse individual who faces an insurable risk as well as some background risk and wants to maximise the expected utility of his/her final wealth. To reduce ex post moral hazard, we follow Huberman et al. (Bell J. Econ. 14:415–426 1983) to assume that alternative insurance contracts satisfy the principle of indemnity and the no-sabotage condition. When the insurance premium is calculated by the expected value premium principle, a necessary and sufficient condition for the optimality of an insurance contract is established under a general dependence structure between insurable and background risks. By virtue of this condition, some qualitative properties of optimal contracts are developed, a scheme is provided to improve any suboptimal insurance strategy, and optimal insurance forms are derived explicitly for some dependence structures of interest. These forms are not always piecewise linear. [ABSTRACT FROM AUTHOR]

In this paper we deal with the mean-variance portfolio selection for a defined contribution (DC) pension fund. Since this problem is time-inconsistent, a number of papers have proposed to tackle it through either a Nash equilibrium approach or a precommitment strategy. Here, we adopt the dynamically optimal approach introduced by Pedersen and Peskir (Math Financ Econ 11:137–160, 2017), and we compare the dynamically optimal strategy with the precommitment one. While it is well known that the precommitment strategy is the solution to a target-based problem, we show that the same holds for the dynamically optimal strategy. In particular, the precommitment strategy has a constant target, while the dynamically optimal strategy has a time-varying target whose expectation coincides with the constant target of the previous case. We also show that the expected wealth is the same under the two approaches. Numerical applications show that (i) the median of the risky asset's share is lower for the precommitment than the dynamically optimal strategy; (ii) the amount of money invested in the precommitment risky portfolio is highly more volatile than in the dynamically optimal case; (iii) the variance of wealth is lower with the precommitment strategy than with the dynamically optimal one; (iv) under scenarios of extreme market returns (either good or bad), the dynamically optimal strategy allows a more effective reaction because of the continuous adjustment of the final target. [ABSTRACT FROM AUTHOR]

We investigate both of analytical and numerical solutions of retirees' spending and investment decisions. We use a dynamic and realistic recursive utility setting which includes the standard expected utility setting as a special case. We find that recursive utility is superior to expected utility in terms of predicting retirees' consumption data. In addition to stock and bond investment decisions, we explicitly include housing decision. Our setting includes the setting without housing as a special case. We estimate retiree decisions numerically through simulations. We provide both of analytical and numerical comparative analysis which shows that some of the analytical dependencies are found to be weak numerically. For example, although marginal propensity to consume depends on the parameter of intertemporal substitution analytically, this dependence is found to be weak numerically. These differences show the importance of providing both of analytical and the numerical solutions. Our analytical solution could be useful for future studies to estimate some model parameters, to evaluate different elderly related policies, to quantify the welfare effects of different decisions and to analyze the parameter related issues such as the interchangeability of some parameters. [ABSTRACT FROM AUTHOR]

This study aims to test the volatility spillover effects among the global risk appetite, the VIX (also known as the fear index) and the RISE index (known as the indicator of investor risk appetite index in Turkey). A temporary or permanent causality Granger and Breitung Candelon (Breitung and Candelon in J Econom 132(2):363–378, 2006) frequency domain causality analyses were performed by using the weekly dataset spanning from January 2010 to December 2018. The results obtained from the study reveals a unilateral causal relationship running from the VIX toward the RISE index. This causality inference is also observed separately in the short-, medium- and the long-run. Consequently, the investigation found that there is a permanent causal relationship running from the VIX toward the RISE index. These results also indicate the existence of the volatility spillover effect among the risk appetite indexes. Consequently, the current study offers significant policy directives from the side of the government and other stakeholders especially that are targeted at mitigating fear factors in the economy. [ABSTRACT FROM AUTHOR]

The financial crisis showed the importance of measuring, allocating and regulating systemic risk. Recently, the systemic risk measures that can be decomposed into an aggregation function and a scalar measure of risk, received a lot of attention. In this framework, capital allocations are added after aggregation and can represent bailout costs. More recently, a framework has been introduced, where institutions are supplied with capital allocations before aggregation. This yields an interpretation that is particularly useful for regulatory purposes. In each framework, the set of all feasible capital allocations leads to a multivariate risk measure. In this paper, we present dual representations for scalar systemic risk measures as well as for the corresponding multivariate risk measures concerning capital allocations. Our results cover both frameworks: aggregating after allocating and allocating after aggregation. As examples, we consider the aggregation mechanisms of the Eisenberg–Noe model as well as those of the resource allocation and network flow models. [ABSTRACT FROM AUTHOR]

Under the German Inheritance Tax and Gift Tax Act, the transfer of business assets can be exempted from taxation up to 100%. However, this exemption depends on the evolution of the company's payroll, which is highly uncertain. We model the uncertain nature of payroll evolution using a Geometric Brownian motion. We obtain closed-form solutions for the expected effective exemption and for the expected effective tax rate. We find that the uncertainty effect is most pronounced for moderate negative and positive growth rates. Furthermore, higher uncertainty reduces the value of the effective tax exemption. Also, we find that the (partially progressive) German inheritance tax function by trend promotes standard exemption. The results enable tax planners to make an optimal choice between standard or full exemption and allow for calculating the expected tax burden. [ABSTRACT FROM AUTHOR]

In diffusion models, a few suitably chosen financial securities allow to complete the market. As a consequence, the efficient allocations of static Arrow-Debreu equilibria can be attained in Radner equilibria by dynamic trading. We show that this celebrated result generically fails if there is Knightian uncertainty about volatility. A Radner equilibrium with the same efficient allocation as in an Arrow-Debreu equilibrium exists if and only if the discounted net trades of the equilibrium allocation display no ambiguity in the mean. This property is violated generically in endowments, and thus Arrow-Debreu equilibrium allocations are generically unattainable by dynamically trading a few long-lived assets. [ABSTRACT FROM AUTHOR]

In this paper, we introduce two kinds of time consistent properties for set-valued dynamic risk measures for discrete-time processes that are adapted to a given filtration, named time consistency and multi-portfolio time consistency. Equivalent characterizations of multi-portfolio time consistency are deduced for normalized dynamic risk measures. In the normalized case, multi-portfolio time consistency is equivalent to the recursive form for risk measures as well as a decomposition property for the acceptance sets. The relations between time consistency and multi-portfolio time consistency are addressed. We also provide a way to construct multi-portfolio time consistent versions of any dynamic risk measure. Finally, we investigate the relationship about time consistency and multi-portfolio time consistency between risk measures for processes and risk measures for random vectors on some product space. [ABSTRACT FROM AUTHOR]

We show that the optimal asset allocation for an investor depends crucially on the decision theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The client data is determined by a standard risk profiling question and the theories we apply are mean-variance analysis, expected utility analysis and cumulative prospect theory. For testing the robustness of our results, we carry out the comparisons for alternative data sets and also for variants of the risk profiling question. [ABSTRACT FROM AUTHOR]