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    Essays on achieving investment targets and financial stability

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    MONIN-DISSERTATION-2013.pdf (1.489Mb)
    Date
    2013-05
    Author
    Monin, Phillip James
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    Abstract
    This dissertation explores the application of the techniques of mathematical finance to the achievement of investment targets and financial stability. It contains three self-contained but broadly related essays. Sharpe et al. proposed the idea of having an expected utility maximizer choose a probability distribution for future wealth as an input to her investment problem rather than a utility function. They developed the Distribution Builder as one way to elicit such a distribution. In a single-period model, they then showed how this desired distribution for terminal wealth can be used to infer the investor's risk preferences. In the first essay, we adapt their idea, namely that a desired distribution for future wealth is an alternative input attribute for investment decisions, to continuous time. In a variety of scenarios, we show how the investor's desired distribution, combined with her initial wealth and market-related input, can be used to determine the feasibility of her distribution, her implied risk preferences, and her optimal policies throughout her investment horizon. We then provide several examples. In the second essay, we consider an investor who must a priori liquidate a large position in a primary risky asset whose price is influenced by the investor's liquidation strategy. Liquidation must be complete by a terminal time T, and the investor can hedge the market risk involved with liquidation over time by investing in a liquid proxy asset that is correlated with the primary asset. We show that the optimal strategies for an investor with constant absolute risk aversion are deterministic and we find them explicitly using calculus of variations. We then analyze the strategies and determine the investor's indifference price. In the third essay, we use contingent claims analysis to study several aggregate distance-to-default measures of the S&P Financial Select Sector Index during the years leading up to and including the recent financial crisis of 2007-2009. We uncover mathematical errors in the literature concerning one of these measures, portfolio distance-to-default, and propose an alternative measure that we show has similar conceptual and in-sample econometric properties. We then compare the performance of the aggregate distance-to-default measures to other common risk indicators.
    Department
    Mathematics
    Description
    text
    Subject
    Inferring preferences
    Distribution builder
    Optimal liquidation
    Hedging
    Contingent claims analysis
    CCA
    Financial crisis
    Stochastic control
    URI
    http://hdl.handle.net/2152/28470
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    • facebook
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    • CONTACT US
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    • UT Austin Home
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    • Web Accessibility Policy
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    © The University of Texas at Austin