Mario Ghossoub (University of Waterloo)
Titel: No-Betting Pareto Optima
Abstract: In a pure-exchange economy with no aggregate uncertainty, when will two economic agents want to bet (engage in speculative trade), thereby introducing uncertainty into the economy? When the agents are risk-averse Expected-Utility (EU) maximizers, it is well-known that betting is Pareto-improving if and only if the agents have heterogeneous beliefs. In this talk, I will re-visit this problem in two situations: (1) One agent has EU preferences, the other agent has Rank-Dependent Utility (RDU) preferences with a general probability distortion function, and allowing for any type or level of belief heterogeneity; and (2) both agents are RDEU-maximizers, with different distortions of the same probability measure. In both situations, we characterize in closed-form and in full generality Pareto-optimal allocations between the two agents, and we derive a necessary and sufficient condition for Pareto-optima to be no-betting allocations (i.e., deterministic allocations). We find, among other things, that in case (1) common beliefs might still lead to a risk-sharing situation in which betting is Pareto-improving; and betting might not always be Pareto-improving when beliefs are divergent. Furthermore, in case (2), it is the difference in probabilistic risk attitudes given common beliefs, rather than heterogeneity or ambiguity in beliefs, that is a driver of betting behavior. As by-product of our analysis, we answer the question of when sunspots matter in this economy.
Nicole Bäuerle (Karlsruher Institut für Technologie)
Titel: Risk Averse Optimization Criteria in Dynamic Financial Decision Making
Abstract: Risk aversion is crucial in financial decision making. In this talk we consider an optimality criterion which is based on the recursive application of static risk measures. This is motivated by recursive utilities in the economic literature and has been studied before for the entropic risk measure. We derive a Bellman equation and prove the existence of Markovian optimal policies. For an infinite planning horizon, the model is shown to be contractive and the optimal policy to be stationary. Moreover, we establish a connection to distributionally robust Markov Decision Processes, which provides a global interpretation of the recursively defined objective function. Monotone models are studied in particular. Applications and numerical issues are also discussed. The talk is based on joint work with Alexander Glauner.
Caroline Hillairet (Ensae Paris-CREST)
Titel: Long Term Yield Curves Modeling: a forward approach.
Abstract: The Ramsey rule, which is the reference equation in the economic literature to compute long term discount rates, links endogenous discount rate and marginal utility of aggregate optimal consumption at equilibrium. We provide a financial interpretation of the Ramsey rule, using marginal utility price and forward utility.The yield curve dynamics, its long term behavior and its dependency on different parameters (such as the wealth of the economy, or the time-horizon for the backward approach) are studied.
This is a joint work with Nicole El Karoui and Mohamed Mrad.
Agostino Capponi (Columbia University)
Titel: Large Orders in Small Markets: The Value of Order Flow Predictability.
Abstract: Institutional investors slice and dice large orders to minimize price impact. They use VWAP algorithms that trade at constant intensity for the duration of the order. Empirically, this (constant) intensity is higher for shorter orders. Observing intensity therefore makes duration predictable. This is puzzling, because investors say they prefer to trade under the radar. We rationalize the empirical findings by showing how, in theory, order predictability can benefit large orders. We further find that the presence of a large order benefits market makers unambiguously, but benefits other (small) investors only if the order trades at high enough intensity. (joint work with Albert Menkveld and Hongzhong Zhang).
Paolo Guasoni (Dublin City University)
Titel: Rogue Traders
Abstract: Investing on behalf of a firm, a trader can feign personal skill by committing fraud that with high probability remains undetected and generates small gains, but that with low probability will bankrupt the firm, offsetting ostensible gains. Honesty requires enough skin in the game: If two traders with isoelastic preferences operate in continuous-time and one of them is honest, the other is honest as long as the respective fraction of capital is above an endogenous fraud threshold that depends on the trader’s preferences and skill. If both traders can cheat, they reach a Nash equilibrium in which the fraud threshold of each of them is lower than if the other one were honest. More skill, higher risk aversion, longer horizons, and greater volatility all lead to honesty on a wider range of capital allocations between the traders.
Sasha Desmettre (Johannes Kepler Universität Linz)
Titel: Dynamic Surplus Optimization with Performance- and Index-Linked Liabilities
Abstract: The increasing importance of liability-driven investment strategies and the shift towards retirement products with lower guarantees and more performance participation provide challenges for the development of portfolio optimization frameworks which cover these aspects. To this end, we establish a general and flexible terminal surplus optimization framework in continuous time, allowing for dynamic investment strategies and stochastic liabilities, which can be linked to the performance of an index or the asset portfolio of the insurance company. Besides optimality results in a fairly general surplus optimization setting, we obtain closed-form solutions for the optimal investment strategy for various specific liability models, which include the cases of index-linked and performance-linked liabilities and liabilities which are completely or only partially hedgeable. We compare the results in numerical examples and study the impact of the performance participation, unhedgeable risk components, different ways of modeling the liabilities and the relative risk aversion parameter. We find that performance- or index-linked liabilities, which provide a close link between the wealth of the insurance company and its liabilities, allow for a higher allocation in the risky investment. On the other hand, unhedgeable risks reduce the allocation in the risky investment. We conclude that, aiming at a high expected return for the policy holder, insurance companies should try to connect the performance of insurance products closely to the wealth and minimize unhedgeable risks.