Journal
MATHEMATICAL METHODS OF OPERATIONS RESEARCH
Volume 63, Issue 1, Pages 169-186Publisher
SPRINGER HEIDELBERG
DOI: 10.1007/s00186-005-0045-1
Keywords
time consistency; multi-stage; target-percentile; value-at-risk; conditional value-at-risk; Markov decision process
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We introduce the time-consistency concept that is inspired by the so-called principle of optimality of dynamic programming and demonstrate - via an example - that the conditional value-at-risk (CVaR) need not be time-consistent in a multi-stage case. Then, we give the formulation of the target-percentile risk measure which is time-consistent and hence more suitable in the multi-stage investment context. Finally, we also generalize the value-at-risk and CVaR to multi-stage risk measures based on the theory and structure of the target-percentile risk measure.
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