Multi-period investment strategies under Cumulative Prospect Theory

TL;DR

This paper explores multi-period investment strategies under Cumulative Prospect Theory, incorporating stochastic benchmarks and constraints, and analyzes their sensitivity to various model parameters through numerical methods.

Contribution

It introduces a novel multi-period CPT model with stochastic benchmarks and constraints, extending prior work by Shi et al. and providing a comprehensive numerical analysis.

Findings

Optimal strategies are sensitive to model parameters.

Inclusion of stochastic benchmarks affects investment decisions.

Portfolio constraints influence the optimal CPT-investment strategies.

Abstract

In this article, inspired by Shi, et al. we investigate the optimal portfolio selection with one risk-free asset and one risky asset in a multiple period setting under cumulative prospect theory (CPT). Compared with their study, our novelty is that we consider a stochastic benchmark, and portfolio constraints. We test the sensitivity of the optimal CPT-investment strategies to different model parameters by performing a numerical analysis.