EURO 2025 Leeds
Abstract Submission

1084. How to choose a model? A consequentialist approach applied to portfolio selection in continuous-time

Invited abstract in session WD-9: Quantitative methods in finance, stream OR in Finance and Insurance .

Wednesday, 14:30-16:00
Room: Clarendon SR 2.01

Authors (first author is the speaker)

1. Moris Strub
Warwick Business School
2. Thaleia Zariphopoulou
The University of Texas at Austin

Abstract

We propose a consequentialist approach to model selection:
Models should be determined not according to statistical criteria, but in view of how they are used. This principle is then studied in detail in the domain of continuous-time portfolio choice. We consider an econometrician with prior beliefs on the likelihood of models to transpire and faced with the task of communicating a single model to a client. The client then takes the model communicated by the econometrician and invests according to the strategy maximizing expected utility within this model. The client receives the consequential performance of trading according to the model communicated by the econometrician in a potentially different model that accurately describes the world. The objective of the econometrician is to choose the model that maximizes the consequential performance of the client, averaged over the likelihood of models to transpire and weighted according to the risk preferences of the econometrician. One of the key findings is that it is in the best to communicate a model that is more optimistic than an unbiased estimator would suggest.

Keywords

Status: accepted

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