Optimal Multivariate Financial Decision Making
Agents who pursue optimal portfolio choice by optimizing a univariate objective (e.g., an expected utility) obtain optimal payoffs that are increasing with each other (comonotonic). This situation may lead to an undesirable level of systemic risk for society. A regulator may therefore aim to enforce diversification among the various portfolios by optimizing a suitable multivariate objective. We assess the cost of diversification and provide the strategy that the regulator should pursue for obtaining the desired level of diversification.
his is joint work with Luca De Gennaro Aquino and Steven Vanduffel.