Document Detail

Roy's Safety-First Portfolio Principle in Financial Risk Management of Disastrous Events.
MedLine Citation:
PMID:  22324563     Owner:  NLM     Status:  Publisher    
Roy pioneers the concept and practice of risk management of disastrous events via his safety-first principle for portfolio selection. More specifically, his safety-first principle advocates an optimal portfolio strategy generated from minimizing the disaster probability, while subject to the budget constraint and the mean constraint that the expected final wealth is not less than a preselected disaster level. This article studies the dynamic safety-first principle in continuous time and its application in asset and liability management. We reveal that the distortion resulting from dropping the mean constraint, as a common practice to approximate the original Roy's setting, either leads to a trivial case or changes the problem nature completely to a target-reaching problem, which produces a highly leveraged trading strategy. Recognizing the ill-posed nature of the corresponding Lagrangian method when retaining the mean constraint, we invoke a wisdom observed from a limited funding-level regulation of pension funds and modify the original safety-first formulation accordingly by imposing an upper bound on the funding level. This model revision enables us to solve completely the safety-first asset-liability problem by a martingale approach and to derive an optimal policy that follows faithfully the spirit of the safety-first principle and demonstrates a prominent nature of fighting for the best and preventing disaster from happening.
Mei Choi Chiu; Hoi Ying Wong; Duan Li
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Publication Detail:
Type:  JOURNAL ARTICLE     Date:  2012-2-10
Journal Detail:
Title:  Risk analysis : an official publication of the Society for Risk Analysis     Volume:  -     ISSN:  1539-6924     ISO Abbreviation:  -     Publication Date:  2012 Feb 
Date Detail:
Created Date:  2012-2-13     Completed Date:  -     Revised Date:  -    
Medline Journal Info:
Nlm Unique ID:  8109978     Medline TA:  Risk Anal     Country:  -    
Other Details:
Languages:  ENG     Pagination:  -     Citation Subset:  -    
Copyright Information:
© 2012 Society for Risk Analysis.
Department of Statistics, The Chinese University of Hong Kong, Hong Kong Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Hong Kong.
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