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arXiv · 1301.3531

On dynamic spectral risk measures, a limit theorem and optimal portfolio allocation

Dilip Madan·Martijn Pistorius·Mitja Stadje
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Abstract

In this paper we propose the notion of continuous-time dynamic spectral risk-measure (DSR). Adopting a Poisson random measure setting, we define this class of dynamic coherent risk-measures in terms of certain backward stochastic differential equations. By establishing a functional limit theorem, we show that DSRs may be considered to be (strongly) time-consistent continuous-time extensions of iterated spectral risk-measures, which are obtained by iterating a given spectral risk-measure (such as Expected Shortfall) along a given time-grid. Specifically, we demonstrate that any DSR arises in the limit of a sequence of such iterated spectral risk-measures driven by lattice-random walks, under suitable scaling and vanishing time- and spatial-mesh sizes. To illustrate its use in financial optimisation problems, we analyse a dynamic portfolio optimisation problem under a DSR.

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Dilip Madan, Martijn Pistorius, Mitja Stadje. 2013-01-15. On dynamic spectral risk measures, a limit theorem and optimal portfolio allocation. https://arxiv.org/abs/1301.3531

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