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Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets

In response to the unprecedented uncertain rare events of the last decade, we derive an optimal portfolio choice problem in a semi-closed form by integrating price diffusion ambiguity, volatility diffusion ambiguity, and jump ambiguity occurring in the traditional stock market and the cryptocurrency...

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Detalles Bibliográficos
Autores principales: Lv, Wujun, Pang, Tao, Xia, Xiaobao, Yan, Jingzhou
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Springer Berlin Heidelberg 2023
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10073631/
https://www.ncbi.nlm.nih.gov/pubmed/37033296
http://dx.doi.org/10.1186/s40854-023-00472-8
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author Lv, Wujun
Pang, Tao
Xia, Xiaobao
Yan, Jingzhou
author_facet Lv, Wujun
Pang, Tao
Xia, Xiaobao
Yan, Jingzhou
author_sort Lv, Wujun
collection PubMed
description In response to the unprecedented uncertain rare events of the last decade, we derive an optimal portfolio choice problem in a semi-closed form by integrating price diffusion ambiguity, volatility diffusion ambiguity, and jump ambiguity occurring in the traditional stock market and the cryptocurrency market into a single framework. We reach the following conclusions in both markets: first, price diffusion and jump ambiguity mainly determine detection-error probability; second, optimal choice is more significantly affected by price diffusion ambiguity than by jump ambiguity, and trivially affected by volatility diffusion ambiguity. In addition, investors tend to be more aggressive in a stable market than in a volatile one. Next, given a larger volatility jump size, investors tend to increase their portfolio during downward price jumps and decrease it during upward price jumps. Finally, the welfare loss caused by price diffusion ambiguity is more pronounced than that caused by jump ambiguity in an incomplete market. These findings enrich the extant literature on effects of ambiguity on the traditional stock market and the evolving cryptocurrency market. The results have implications for both investors and regulators.
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spelling pubmed-100736312023-04-05 Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets Lv, Wujun Pang, Tao Xia, Xiaobao Yan, Jingzhou Financ Innov Research In response to the unprecedented uncertain rare events of the last decade, we derive an optimal portfolio choice problem in a semi-closed form by integrating price diffusion ambiguity, volatility diffusion ambiguity, and jump ambiguity occurring in the traditional stock market and the cryptocurrency market into a single framework. We reach the following conclusions in both markets: first, price diffusion and jump ambiguity mainly determine detection-error probability; second, optimal choice is more significantly affected by price diffusion ambiguity than by jump ambiguity, and trivially affected by volatility diffusion ambiguity. In addition, investors tend to be more aggressive in a stable market than in a volatile one. Next, given a larger volatility jump size, investors tend to increase their portfolio during downward price jumps and decrease it during upward price jumps. Finally, the welfare loss caused by price diffusion ambiguity is more pronounced than that caused by jump ambiguity in an incomplete market. These findings enrich the extant literature on effects of ambiguity on the traditional stock market and the evolving cryptocurrency market. The results have implications for both investors and regulators. Springer Berlin Heidelberg 2023-04-05 2023 /pmc/articles/PMC10073631/ /pubmed/37033296 http://dx.doi.org/10.1186/s40854-023-00472-8 Text en © The Author(s) 2023 https://creativecommons.org/licenses/by/4.0/Open AccessThis article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/ (https://creativecommons.org/licenses/by/4.0/) .
spellingShingle Research
Lv, Wujun
Pang, Tao
Xia, Xiaobao
Yan, Jingzhou
Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
title Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
title_full Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
title_fullStr Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
title_full_unstemmed Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
title_short Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
title_sort dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets
topic Research
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10073631/
https://www.ncbi.nlm.nih.gov/pubmed/37033296
http://dx.doi.org/10.1186/s40854-023-00472-8
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