Risk Tolerance and Optimal Portfolio Choice
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Date: 10-05-2006
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Marek Masiela, BNP Paribas (London)
Location: 303 Mudd
Abstract
A new framework for utility maximization is introduced. General classes of such utilities are constructed by combining the variational utility input with information about the market dynamics which are represented by the general multidimensional Ito process. Explicit closed form expressions for optimal allocations are obtained. They depend on the coefficients of the market dynamics, on the optimal wealth level and on the utility-generated measure of risk tolerance. Direct and analytic link is established between the distribution of wealth in the future and the implicit to it current risk tolerance. Consequently, given the equilibrium market dynamics and given the views an investor formulates with respect to this equilibrium, the specification of distribution of wealth in the future provides information about the current risk tolerance and the utility function of an investor.
Bio
Marek Musiela is Global Head of BNP Paribas Fixed Income Research and Strategy Team (FIRST). His team develops, implements and supports quantitative models for credit, foreign exchange and interest rates businesses.
Marek has a distinguished professional career. His area of expertise lies in stochastic calculus, probability, statistics and applications of such methods in finance. His current main interests lie in reconciling the latest academic research with its applications to pricing and hedging of financial derivatives and to other aspects of financial risk management. Marek is best known for his contribution to the development of term structure models. Among other things he introduced the so called ‘Musiela parameterisation’ and is the co-developer of the ‘BGM’ or ‘Market Models’. His book, co-authored with M. Rutkowski, entitled ‘Martingale Methods in Financial Modelling’ provides a comprehensive, self-contained, and up-to-date treatment of the main topics in the option pricing theory and is considered to be a classic in this area. Marek gained PhD in Mathematics from the Polish Academy of Sciences in 1976.