EP-CVaR risk measure approach and its application in portfolio optimization

We develop a new risk measure using transition density for the problem of risk assessment when investors implement the stop strategy. Since the introduction of the stop strategy, the exit time when investors decide to withdraw the transaction has become uncertain. Risk and time are intertwined. The present is known while the future is inherently risky. Price uncertainty has become a double uncertainty of price as well as exit time. The existing risk indicators cannot measure this double uncertainty. Using data transformation and adding exit probability to traditional CVaR, we introduce a new risk measure in this paper known as EP-CVaR. The EP-CVaR method can solve the problem of uncertain exit time caused by use of the stop strategy. Numerical experiments with real market data show the usefulness of the proposed model.