Scholars publish research on optimal collective investment under regulatory uncertainty
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An Chen, Christian Laudagé, and Shihao Zhu have published a working paper studying optimal collective investment under VaR-type constraints when future regulatory requirements are uncertain, characterizing the optimal terminal wealth shape that combines a constant wealth region at the regulatory threshold with a Merton-type investment region. The study sets constraints involving multiple potential wealth thresholds, requiring the weighted average compliance probability to meet a minimum standard. Numerical results show that when the required compliance probability is high, the small wealth threshold is high, or initial capital is limited, regulatory constraints significantly reshape optimal returns, resulting in substantial welfare losses compared to unconstrained investment. The distribution of welfare losses across a heterogeneous investor pool correlates with risk aversion composition and Pareto weights; losses are particularly pronounced when high risk-aversion investors dominate, and small contributors may bear losses disproportionately to their contributions.
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- arXiv q-finOptimal Collective Investment under Regulatory Uncertainty
This study focuses on optimal collective investment under VaR-type constraints that account for uncertainty in future regulatory requirements, characterizing optimal terminal wealth that combines a constant wealth region at the regulatory threshold with a Merton-type investment region. The study finds that high compliance probability, high small-wealth thresholds, or limited initial capital substantially reshape optimal returns and cause significant welfare losses. The distribution of welfare losses across a pool of heterogeneous investors is related to risk aversion composition and Pareto weights, with losses particularly pronounced when high risk-aversion investors dominate, and small contributors may bear losses far exceeding their contribution share.
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