Statistics Seminar（2013-21）

Topic:Sensitivity Analysis of Nonlinear Behavior with Distorted Probability

Speaker:Xiangwei Wan, Shanghai Jiao Tong University

Time:Thursday, 28 November, 14:00-15:30

Location:Room 217, Guanghua Building 2

Abstract：One of the important issues in behavioral analysis is that the time consistency property is lost due to the distortion in performance probability. The standard approach in performance optimization, the dynamic programming, fails to work in this area. In this paper, we propose to use an alternative approach, the sensitivity-based analysis, to study this nonlinear behavior with probability distortion. With this approach, we find a local linearity property of the distorted performance, which we call "mono-linearity". We apply the mono-linearity to the portfolio management problem under distorted performance. The first-order condition for the optimal solution is presented, from which we obtain the optimal terminal wealth for the complete market and give several characterizations of optimal solutions in the general market setting of incomplete markets; a solvable incomplete market example with unhedgeable interest rate risk is also provided. We expect that this sensitivity-based approach is generally applicable to optimization in behavioral analysis.

About the speaker：Xiangwei Wan has been an Assistant Professor at Antai College of Economics and Management, Shanghai Jiao Tong University since 2011. He received a Ph.D. degree in Financial Engineering at the Chinese University of Hong Kong in 2010 and got a B.S. in Mathematics at University of Science and Technology of China in 2006. His main research interests are in financial engineering, and Financial Economics.