Discrete-Time Mean-CVaR Portfolio Selection and Time-Consistency Induced Term Structure of the CVaR

We investigate a discrete-time mean-CVaR portfolio selection problem by embedding this time-inconsistent problem into a family of expected utility maximization problems with piecewise-linear utility functions. In contrast to... [ view full abstract ]

We investigate a discrete-time mean-CVaR portfolio selection problem by embedding this time-inconsistent problem into a family of expected utility maximization problems with piecewise-linear utility functions. In contrast to the complete, continuous-time solution, the mean-CVaR efficient frontier in the discrete-time setting is a straight line in the mean-CVaR plane. We further solve an inverse investment problem, where we investigate how mean-CVaR preferences need to adapt such that the pre-commited optimal strategy remains optimal at any point in time. Finally, an empirical application of our results suggests that risk measured by the CVaR might help to understand the long-standing equity premium puzzle.