IMA Journal of Management Mathematics Advance Access published March 9, 2015

IMA Journal of Management Mathematics (2015) Page 1 of 19

doi:10.1093/imaman/dpv005

Time consistency and time consistent generalized convex

multistage risk measures

Li Yang
Department of Computing Science, School of Mathematics and Statistics, Xi’an Jiaotong University,
Xi’an 710049, Shaanxi, PR China and School of Economics & Management, Guangxi Normal

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University, Guilin 541001, Guangxi, PR China
and
Zhi Ping Chen∗ and Feng Zhang
Department of Computing Science, School of Mathematics and Statistics, Xi’an Jiaotong University,
Xi’an 710049, Shaanxi, PR China
∗
Corresponding author: zchen@mail.xjtu.edu.cn
[Received on 18 June 2013; accepted on 24 January 2015]

After demonstrating four basic properties a multi-period risk measure should satisfy, a class of gener-
alized convex multi-period risk measures is defined, which improves and extends existing coherent and
convex multi-period risk measures. With respect to this kind of generalized convex multi-period risk
measure, the equivalence among different notions of time consistency of risk measure is established. Fur-
thermore, by introducing a fair property that any sophisticated multi-period risk measure should satisfy,
we show that if the multi-period risk measure is time consistent, then optimal decisions derived under this
risk measure also satisfy the time consistency of optimal policy. Finally, we present the concrete struc-
ture of the time consistent generalized convex multi-period risk measure, and illustrate through several
examples how to construct time consistent generalized convex multi-period risk measures from existing
single-period risk measures.

Keywords: conditional risk measure; generalized convex risk measure; multi-period risk measure; time
consistency of risk measure; time consistency of optimal policy.

1. Introduction
Since the pioneering work of Markowitz (1952), financial risk measurement models have undergone
continuous improvement and innovation. So far, the single-period risk measures having good back-
grounds can be classified into four main categories: coherent risk measure (Artzner et al., 1999; Acerbi
& Tasche, 2002; Rockafellar & Uryasev, 2002; Chen & Wang, 2008), convex risk measure (Föllmer
& Schied, 2002; Lüthi & Doege, 2005; Frittelli & Rosazza Gianin, 2002), quasiconvex risk measure
(Cerreia-Vioglio et al., 2011; Drapeau & Kupper, 2013; Frittelli & Maggis, 2011) and generalized con-
vex risk measure (Chen & Yang, 2011; Chen et al., 2012). Coherent risk measure is suitable for financial
markets having perfect liquidity. Convex risk measure and generalized convex risk measure are free of
the liquidity limitation. But as demonstrated in Dhaene et al. (2003), the translation invariance required
by coherent risk measure and convex risk measure means that the way in which we allocate the eco-
nomic capital among sub-companies within a financial conglomerate is irrelevant. Apparently, all the
works done nowadays on capital allocation assume incoherent risk measures. Meanwhile, as pointed out


c The authors 2015. Published by Oxford University Press on behalf of the Institute of Mathematics and its Applications. All rights reserved.
2 of 19 L. YANG ET AL.

by El Karoui & Ravanelli (2009), the translation invariance fails once there is any form of uncertainty
about interest rates (Cerreia-Vioglio et al., 2011). For the above reasons, quasiconvex risk measure and
generalized convex risk measure have been proposed. Compared with quasiconvex risk measure, the
generalized convex risk measure introduced by Chen & Yang (2011) and Chen et al. (2012) can flex-
ibly reflect the investor’s degree of risk aversion, and can control the fat-tail phenomenon of the loss
distribution.
In real financial markets, the information is constantly changing, the single-period risk measure can
not reflect this change. Especially, since the existence of the intermediate cash flow, the decision maker

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should timely reevaluate the future risk according to the changed information. To reduce losses and
control risks at all times of the decision period, many scholars have recently studied the risk measure
construction under the multi-period framework, see, for instance, Artzner et al. (2007), Beraldi et al.
(2013) and Delbaen (2006).
Different from the single-period risk measure, the key issue associated with the multi-period risk
measure is the time consistency. Generally speaking, the study on the relationship between different
elements ρτ ,T and ρθ,T (0  τ , θ < T) of the multi-period risk measure (ρt,T )Tt=0 is called the time con-
sistency of risk measure. Several notions of time consistency of multi-period (dynamic) risk measures
have been proposed from different points of view. Cheridito & Kupper (2011) defined time consistency
in an inequality ordering relation of risk measure; Detlefsen & Scandolo (2005) introduced the time con-
sistency of risk measure by an equality ordering relation; Peng (2004) defined the time consistency of
risk measure based on the recursive equation, and similar definitions can be found in Detlefsen & Scan-
dolo (2005) and Artzner et al. (2007). Acciaio & Penner (2011) proved the equivalent relation among
the above time consistencies. All the aforementioned time consistencies of multi-period risk measure
do not examine losses at different time points, only the order relation maintenance corresponding to risk
values evaluated at different times are considered. Obviously, the above definitions of time consistency
of multi-period risk measure is not convincing. Through considering losses between time τ and time
θ , Riedel (2004) defined the time consistency of dynamic risk measure by an equality ordering rela-
tion; Cheridito et al. (2006) described the time consistency in recursive form; under some conditions,
Ruszczyński (2010) proved that the time consistency defined by the ordering relation is equivalent to
the time consistency defined by the recursive equation.
The ultimate purpose of designing a risk measure is to make decision. One natural question is then:
if a multi-period risk measure is time consistent, whether the optimal decisions based on the multi-
period risk measure are time consistent or not? The answer to this question is important for solving
actual multi-stage decision-making problems, while very few literature concerns about this issue. After
discussing the relationship among different time consistencies of risk measure under the condition that
the intermediate losses are considered, the relationship between the time consistency of risk measure
and the time consistency of the optimal policy will be analyzed in this paper.
At present, the theoretical research on multi-period risk measure has obtained many valuable results.
However, some practices about the construction of multi-period risk measures and their application in
multi-stage decision making are questionable. Firstly, some scholars directly apply the classical mean-
variance framework to the dynamic situation and make decisions based on the resulting dynamic mean-
variance model, typical researches include Zhou & Li (2000), Celikyurt & Ozekici (2007) and Basak
& Chabakauri (2010). The advantage of these dynamic mean-variance models is that the analytical
optimal strategy can be derived, which greatly reduce the solution time. But the above mean–variance
models cannot reflect the significant skewness and control the fat tails of the loss distribution. Sec-
ondly, in many studies about multi-stage portfolio management, it is assumed that investors are only
concerned with the variation of the final wealth, and the specific single-period risk measure is directly
 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 3 of 19

applied to the final wealth to make decisions. For example, Li & Ng (2000) and Zhou & Li (2000)
generalized the classical mean–variance model to the dynamic framework, where the objective func-
tion only considers the mean and variance of the final wealth; Tapaloglou et al. (2008) established a
multi-stage financial management model, whose goal is to minimize the portfolio’s CVaR value at the
final stage. For multi-period investment problems, rational investors not only care about the change of
the final wealth, but also consider the potential risk that may exist in each stage. If one only concerns
about the variation of the cash flow at final stage, then multi-period characteristics can not be captured
fully; meanwhile, since the potential losses caused by the intermediate cash flow are not taken into

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account, individuals or companies may subject to bankruptcy. Thirdly, current multi-period risk mea-
sures considering both the intermediate cash flow and time consistency are essentially established from
the expectation operator, which are only suitable for risk-neutral investors. On the other hand, some
papers, such as Artzner et al. (2007) and Ruszczyński (2010), proposed multi-period risk measures
under the framework of coherent or convex risk measure. Similarly to the discussion in Chen & Yang
(2011), coherent and convex risk measures have several limitations in practical applications and need
further improvement. Consequently, it is necessary to construct multi-period risk measures which are
time consistent, can depict the investor’s risk aversion and can reflect the influence of the intermediate
cash flow.
Based on the above discussions, the relationship among different time consistencies is firstly
explored in this paper, where intermediate cash flows are considered. Also we investigate the con-
crete structure of the time consistent generalized convex multi-period risk measure, and we further
show how to construct a new generalized convex multi-period risk measure from existing single-period
generalized convex risk measures.
The rest of this paper is organized as follows. The basic concepts corresponding to the generalized
convex multi-period risk measure are introduced in Section 2. In Section 3, we explore the relationship
among different notions of time consistency of multi-period risk measure, and the relationship between
the time consistency of risk measure and the time consistency of optimal policy. The specific structure
of generalized convex multi-period risk measures satisfying the time consistency of risk measure is
illustrated in Section 4. In this section, through several examples, we also show how to extend existing
generalized convex static risk measures to the multistage situation. The brief conclusions are given in
Section 5.

2. Generalized convex multistage risk measures

Given a probability space (Ω, F, P), where Ω is the discrete sample space, F is the σ −algebra gen-
erated by all subsets of Ω, and P : F → [0, 1] is the probability measure. Meanwhile, given a set H =
{0, 1, 2, . . . , T} and a σ −algebra sequence (filtration) F0 ⊆ F1 ⊆ F2 ⊆ · · · ⊆ FT , where F0 = {∅, Ω} and
FT = F. Here Ft stands for the known information till time t. We assume that a sequence of random
variables {zt }t∈H on Ω is adapted to the filtration {Ft }t∈H , that is, for each t, zt is Ft −measurable. We
assume that the smaller the zt , the better; zt can be interpreted as the random cost at time t. Let Yt denote
the linear space composed of Ft −measurable functions zt : Ω → R. Usually, Yt can be selected as the
space consisting of all essentially bounded Ft −measurable functions, for example, Yt := L∞ (Ω, Ft , P).
Let Yt,T = Yt × Yt+1 × · · · × YT .
In this paper, equalities or inequalities between random vectors are understood component-wisely
and in the almost sure sense. Meanwhile, it is assumed that the chosen scenarios can accurately reflect
the future uncertainty of the security market.
4 of 19 L. YANG ET AL.

Definition 2.1 The Ft -adapted ρt,T : Yt,T → Yt is called a generalized convex conditional risk measure
if it satisfies the following conditions

(zi) zero invariance: ρt,T (0) = 0;

(mon) monotonicity: For any x, y ∈ Yt,T , if x  y, then ρt,T (x)  ρt,T (y);

(con) convexity: For any x, y ∈ Yt,T and λ ∈ Yt with 0  λ  1, ρt,T (λx + (1 − λ)y)  λρt,T (x) +
(1 − λ)ρt,T (y);

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(ta) translation additivity: For any z ∈ Yt,T ,

ρt,T (zt , zt+1 , . . . , zT ) = zt + ρt,T (0, zt+1 , . . . , zT ).

ρt,T represents the risk assessment at time t on losses that may occur in the future. ρt,T does not rely
on the information to be revealed in the future, that is, ρt,T (z) is Ft −measurable. As F0 = {∅, Ω}, the
space Y0 could be regarded as R, so ρ0,T (z) is a real-valued function. Zero invariance is very natural. If
ρt,T does not satisfy (zi), we can let ρt,T (z) = ρt,T (z) − ρt,T (0), then ρt,T (z) satisfies (zi); monotonicity
means that a stochastic dominating financial position has less risk, which conforms to the fact that
investors prefer less loss rather than more loss; convexity implies that diversification does not increase
risk, which is in accordance with the wisdom in investment community—do not put all your eggs in
one basket. (ta) is obvious. The above properties are fundamental characteristics that a reasonable risk
measure should satisfy. For further financial interpretation of these properties, one can refer to Artzner
et al. (1999), Wang et al. (1997) and Frittelli & Rosazza Gianin (2005).
At present, the research on multi-period risk measure is growing rapidly, and many research results
have appeared. The main stream studies can be divided into two axiomatic systems: multi-period coher-
ent risk measure and multi-period convex risk measure. To illustrate these measures, we introduce the
following properties:
(pte) predictable translation equivariance: For any z ∈ Yt,T and aθ ∈ Yt with t  θ  T, ρt,T (zt , . . . , zθ−1 ,
aθ + zθ , zθ+1 , . . . , zT ) = aθ + ρt,T (zt , . . . , zθ−1 , zθ , zθ+1 , . . . , zT ).
(ph) positive homogeneity: For any z ∈ Yt,T and β ∈ Yt with β  0, ρt,T (βz) = βρt,T (z).
If ρt,T , t ∈ H\{T}, satisfies (mon), (con), (pte) and (ph), then (ρt,T )Tt=0 is called a multi-period coher-
ent risk measure. Studies on this aspect can be found in, say, Riedel (2004), Delbaen (2006) and
Artzner et al. (2007). From the property (ph), it is easy to see the prerequisite for adopting a coher-
ent risk measure to make decision is that the portfolio held by the investor should have perfect liquidity
during the whole decision process. Once this situation is broken, the liquidity risk will exist. Due to
this phenomenon, some researchers proposed the concept of multi-period convex risk measure. If ρt,T ,
t ∈ H\{T}, satisfies (mon), (con) and (pte), then the risk measure (ρt,T )Tt=0 is called a multi-period con-
vex risk measure. The study about multi-period convex risk measures has become a hot issue in recent
years, one can see Frittelli & Rosazza Gianin (2004), Detlefsen & Scandolo (2005) and Klöppel &
Schweizer (2007) for details. However, as demonstrated in Chen & Yang (2011), (pte) means that the
way in which we allocate the economic capital among sub-companies within a financial conglomerate
is irrelevant. However, the rational allocation of funds is a very important factor affecting the decision
performance. With the foregoing analysis, the generalized convex multi-period risk measure can be nat-
urally defined as a series of generalized convex conditional risk measures, which results in the following
definition.
 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 5 of 19

Definition 2.2 If ρt,T : Yt,T → Yt , t ∈ H\{T} are generalized convex conditional risk measures, then
the risk measure family (ρt,T )Tt=0 is called a generalized convex multi-period risk measure.

(zi) and (ta) can be deduced from properties (pte) and (ph). Therefore, if a multi-period risk measure
is coherent, it is generalized convex. Without loss of generality, we assume ρt,T (0) = 0, here t ∈ H\{T}.
It is then not difficult to verify that: if a multi-period risk measure is convex, it is also generalized
convex. Combining these facts, the generalized convex multi-period risk measure is an improvement
and extension to existing coherent and convex multi-period risk measures. We will further illustrate that

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the generalized convex multi-period risk measure provides decision makers more freedom to choose
some generalized convex single-period risk measures with better properties than coherent or convex
risk measures to construct multi-period risk measures.
Multi-period risk measures are actually risk assessment results over time on future uncertainty. It is
easy to see from Definition 2.2 that our generalized convex multi-period risk measure not only considers
the impact of the cash flow at the final stage on risk measure but also examines the contribution of the
cash flow in intermediate stages to investment risk. The generalized convex multi-period risk measure
generalizes the risk measures defined in some papers such as Tapaloglou et al. (2008). The strategy made
under the generalized convex multi-period risk measure can prevent bankruptcy during the decision
process; meanwhile, compared with the multi-period risk measure relying only on the cash flow at
the final stage, the generalized convex multi-period risk measure can control losses at intermediate
stages, which is very important for investors who might withdraw their investment within the investment
horizon. Moreover, the optimal decisions derived from the portfolio optimization problem based on
the generalized convex multi-period risk measure satisfy the requirement of nonanticipativity, that is,
the optimal decision at time t (t ∈ H) depends only on the revealed historical information and is a
measurable function of the information known until time t. Also, if the current moment is time t (t ∈
H \ {T}), then we do not know the exact result which will occur in the future; however, it is usually clear
which scenarios may occur and which scenarios will not occur certainly. So a natural requirement is
that the optimal decisions should only rely on scenarios that may occur (Shapiro, 2009). The multistage
decision-making problem based on our generalized convex multi-period risk measure meet the above
requirement.

3. Time consistency
In addition to the properties defined in Definition 2.1, it is now accepted that time consistency is an
important and basic property that a reasonable multi-period risk measure should satisfy. Different expla-
nations to the time consistency of risk measure would result in different time consistent multi-period
risk measures. Here, the four properties in Definition 2.1 are basic properties that any multi-period risk
measure should satisfy, and they have been widely recognized by academic and practical communities.
Therefore, relying on the generalized convex multi-period risk measure and considering the relationship
of losses between time τ and time θ , 0  τ , θ  T, we now explore the relationship among different time
consistencies.
Many scholars define time consistency of dynamic risk measure through examining the order rela-
tion between risk assessment values derived at different times. Detlefsen & Scandolo (2005) defined
time consistency based on the equation ordering relation, this definition does not compare losses
between time τ and time θ , and only pay attention to the ordering relation maintenance of different
risk values evaluated at time τ and time θ , which is unconvincing. By considering losses between time
6 of 19 L. YANG ET AL.

τ and time θ , Riedel (2004) defined time consistency of multi-period risk measure in terms of the equal-
ity ordering relation. Concretely, the following two definitions, TC1 and TC2 are the time consistency
of multi-period risk measure defined through the equation ordering relation and the inequality ordering
relation, respectively.

TC1 For τ < θ , τ , θ ∈ H, and z, w ∈ Yτ ,T , if

zk = wk , k = τ , . . . , θ − 1 and ρθ,T (zθ , . . . , zT ) = ρθ,T (wθ , . . . , wT ) (3.1)

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hold, then we have
ρτ ,T (zτ , . . . , zT ) = ρτ ,T (wτ , . . . , wT ).
TC2 for τ < θ , τ , θ ∈ H and z, w ∈ Yτ ,T , if

zk = wk , k = τ , . . . , θ − 1 and ρθ,T (zθ , . . . , zT )  ρθ,T (wθ , . . . , wT ) (3.2)

are true, then we have

ρτ ,T (zτ , . . . , zT )  ρτ ,T (wτ , . . . , wT ). (3.3)

Time consistencies based on different ordering relations are the same in principle, they can be under-
stood as: given two risk positions x and y, if the risk assessment of x is at least as good as that of y at
some time θ in the future, and regardless of which state occurs in the period from time τ to time θ , the
realizations of x are the same as those of y, then the risk assessment of x will not be worse than that of y
at time τ . The ordering relation time consistency demonstrates some sort of continuity in investors’ risk
preference with the time going. Thus, it is natural to require that a multi-period risk measure satisfies
the time consistency based on the ordering relation. From the above description, we can see that the
multi-period risk measure satisfying TC1 or TC2 should be independent of historical information, that
is, the data information before time t should not affect the risk assessment result at time t.
Many papers, such as Peng (2004), Detlefsen & Scandolo (2005), Artzner et al. (2007) and Acciaio
& Penner (2011), defined the time consistency of multi-period risk measure in the form of a recursive
equation. However, these definitions do not compare losses between time τ and time θ . The following
definition, TC3, establishes time consistency of multi-period risk measure in the recursive form where
losses between time τ and time θ are considered, a similar definition is given in Cheridito et al. (2006).

TC3 For τ < θ , τ , θ ∈ H \ {T}, and z ∈ Yτ ,T , we have

ρτ ,T (zτ , . . . , zθ , . . . , zT ) = ρτ ,θ (zτ , . . . , zθ−1 , ρθ,T (zθ , . . . , zT )). (3.4)

Here ρτ ,θ (·) is defined as

ρτ ,θ (zτ , . . . , zθ ) = ρτ ,T (zτ , . . . , zθ , 0, . . . , 0), 0  τ  θ  T. (3.5)

As we pointed out, the four properties (zi), (mon), (con) and (ta) are necessary properties that a
multi-period risk measure should satisfy. Based on the generalized convex multi-period risk measure,
we now explore the relationship among the above three forms of time consistency, TC1, TC2 and TC3.
Proposition 1 TC1, TC2 and TC3 are mutually equivalent.

Proof. Firstly, we prove that TC1 is equivalent to TC3.

 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 7 of 19

Consider two sequences

z = (zτ , . . . , zθ−1 , zθ , . . . , zT )
and
w = (zτ , . . . , zθ−1 , ρθ,T (zθ , . . . , zT ), 0, . . . , 0).
From (ta) and (zi), it is easy to obtain that

ρθ,T (ρθ,T (zθ , . . . , zT ), 0, . . . , 0) = ρθ,T (zθ , . . . , zT ) + ρθ,T (0, . . . , 0) = ρθ,T (zθ , . . . , zT ).

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Therefore, if TC1 holds, we have ρτ ,T (z) = ρτ ,T (w). Using (5), we obtain

ρτ ,T (zτ , . . . , zθ , . . . , zT ) = ρτ ,θ (zτ , . . . , zθ−1 , ρθ,T (zθ , . . . , zT )),

which implies TC3 holds.

On the other hand, suppose that TC3 holds. For two arbitrary sequences z and w satisfying the
condition (1), it is easy to derive from (mon) and TC3 that

ρτ ,T (zτ , . . . , zT ) = ρτ ,θ (zτ , . . . , zθ−1 , ρθ,T (zθ , . . . , zT ))

= ρτ ,θ (zτ , . . . , zθ−1 , ρθ,T (wθ , . . . , wT )) = ρτ ,T (wτ , . . . , wT ),

which means that TC1 is true.

Next, we prove that TC2 is equivalent to TC3.
If TC2 is true, it is easy to prove that TC1 holds. Together with the fact that TC1 is equivalent to
TC3, it is easy to deduce that TC3 holds.
On the contrary, suppose that TC3 holds. Considering two sequences z and w satisfying the condition
(2), due to (mon), we have

ρτ ,T (zτ , . . . , zθ−1 , ρθ,T (zθ , . . . , zT ), 0, . . . , 0)

 ρτ ,T (wτ , . . . , wθ−1 , ρθ,T (wθ , . . . , wT ), 0, . . . , 0).

This and (4) and (5) ensure that (3) is true.

So far, we have proved two facts: TC1 is equivalent to TC3 and TC2 is equivalent to TC3. Therefore,
TC1, TC2 and TC3 are mutually equivalent. 

In practice, decisions made under an uncertain system often affects the realizations of the uncer-
tainty. To describe this mathematically, we assume that Ωt is the set of all states at stage t, t ∈ H, ξt ∈ Ωt
.
is a state of the data process at time t. For 0  s  t  T, let ξ[s,t] = {ξs , . . . , ξt }. In particular, ξ[0,t] repre-
sents the history of the process from the root node to node ξt . Then, we can view zt = ft (xt , ξt ), where
xt denotes the decision vector at time t, which is a function of the history ξ[0,t] and usually subjects to
some constraints. The constraints can be described as:

x0 ∈ X0 , xt ∈ Xt (xt−1 , ξt ), t = 1, 2, . . . , T, (3.6)

where X0 ∈ Rn0 is a deterministic set, and Xt : Rnt−1 × Ft ⇒ Rnt , t = 1, 2, . . . , T. For t ∈ H, if we assume

ft (· , ξt ) is convex on Xt , and ρt,T : Yt,T → Yt satisfies (mon) and (con), then ρt,T (ft (· , ξt ), · · · , fT (· , ξT )) is
also convex. This conclusion is very important for the decision problem whose objective is to minimize
the above composite function. If the feasible region of the decision problem is also convex, then the
corresponding decision problem becomes a convex program.
8 of 19 L. YANG ET AL.

The purpose to construct a multi-period risk measure is to make decisions. For the given information
filtration and the constructed multi-period risk measure, the optimal decisions made at different time
periods should keep persistence. That is, the optimal decision based on ρt,T should not conflict with the
optimal decision based on ρθ,T , 0  θ < t  T, which is called the time consistency of the optimal policy.
To state it, we first consider the following multi-stage optimization problem when one stands at the state
ξt , t ∈ H, the objective is to minimize the generalized convex conditional risk measure, conditional on a
realization ξ0 , . . . , ξt of the data process, ξ[0,t] :

min ρt,T (ft (xt , ξt ), . . . , fT (xT , ξT ))|ξ[0,t]

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(xt ,...,xT )
(3.7)
s.t. xτ ∈ Xτ (xτ −1 , ξτ ), τ = t, . . . , T.

Here, we assume that X0 (x−1 , ξ0 ) = X0 when t = 0, and ρT,T (fT (xT , ξT )) = fT (xT , ξT ). We can use
stochastic optimization algorithms (Domenica et al., 2009; Higle et al., 2010) to solve problem (7).
With respect to the optimization problem (7), the time consistency of optimal policy can be
expressed as follows.

TC4 The generalized convex multi-period risk measure (ρt,T )Tt=0 satisfies the time consistency of
optimal policy if the following two conditions hold:

(i) For θ ∈ H \ {T}, if x∗τ , τ = θ , . . . , T, is the optimal decision sequence corresponding

to problem (7) for t = θ , conditional on a realization ξ0 , . . . , ξθ of the data process,
then x∗τ , τ = θ + 1, . . . , T, is the optimal decision sequence of problem (7) for t =
θ + 1, conditional on a realization ξ0 , . . . , ξθ , ξθ+1 of the data process.
(ii) For every θ ∈ H, if the decision vector x∗θ is determined by


x∗θ ∈ arg min ρθ,T (fθ (xθ , ξθ ), fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT )) , (3.8)
xθ ∈Xθ ξ[0,θ ]

then (x∗θ , . . . , x∗T ) is an optimal decision sequence of problem (7) for t = θ , conditional
on a realization ξ0 , . . . , ξθ of the data process.

Remark 1 TC4 is irrespective of f , it is applicable for any random function ft (xt , ξt ), 0  t  T. Mean-
while, the above x∗τ is actually a function of ξ[0,θ] , x∗τ = x∗τ (ξ[0,τ ] ), τ ∈ H.
If the optimal policy is time consistent, then at any moment, the decision maker will not regret
to optimal decisions she has made before. The optimization problem (7) can be solved recursively.
Shapiro (2009) defined the time consistency of optimal policy based on the condition (i) in TC4 and
derived some important properties. Based on the relationship between the optimal decision sequence
of problem (7) for t = 0 and the optimal sub-policy of problem (7) for t = θ (θ = 1, 2, . . . , T), Boda &
Filar (2006) introduced the time consistency of optimal policy. Our description of the time consistency
of optimal policy improves those definitions in the literature, because we can derive several important
and useful conclusions in what follows.
Before demonstrating the relationship between TC4 and the time consistency of multi-period risk
measure, we introduce the following property.
(memon) For θ ∈ H \ {T}, if

ρθ+1,T (zθ+1 , . . . , zT )  ρθ+1,T (wθ+1 , . . . , wT )

 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 9 of 19

∗ ∗
holds for z, w ∈ Yθ,T , and there exists some ξθ+1 ∈ Ωθ+1 with P(ξθ+1 ) > 0 such that the above inequality
∗
is strict with respect to ξθ+1 , then we have

ρθ,T (zθ , zθ+1 , . . . , zT )  ρθ,T (zθ , wθ+1 , . . . , wT ),

and the above inequality is strict with respect to ξθ∗ ∈ Ωθ , here ξθ∗ is the immediate predecessor of ξθ+1
∗
.
The property (memon) requires the risk measure selected by investors can rank strictly different
investment risks. For decision makers who demand clear and strict distinction on risks, the requirement
(memon) is rather reasonable. This kind of investors often requires that the selected risk measure is

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sophisticated enough to capture the subtle variation in the risk. Especially, for large financial investment
institutions, if the chosen multi-period risk measure does not satisfy the requirement (memon), their
investment decision might result in a significantly different result due to a very small change in their
investment position.
Under (memon), it is not difficult to verify that if a generalized convex multi-period risk measure
is time consistent, i.e., TC1, TC2 or TC3 is true, then the optimal investment policy derived from the
portfolio selection problem with this generalized convex multi-period risk measure as the objective
function satisfies the time consistency of optimal policy, in other words, TC4 holds.
Proposition 2 If (memon) and TC2 hold, then TC4 is true.

Proof. We first prove that if TC2 is true, then the condition (i) in TC4 follows.
Assume that x∗θ+1 , . . . , x∗T is not the optimal decision sequence of problem (7) for t = θ + 1, condi-
∗ ∗
tional on a realization ξ0 , . . . , ξθ , ξθ+1 of the process. There will exist an ξθ+1 ∈ Ωθ+1 with P(ξθ+1 ) > 0,
and a feasible solution ȳθ+1 , . . . , ȳT of problem (7) for t = θ + 1, conditional on a realization ξ0 , . . . , ξθ ,
∗
ξθ+1 of the process, such that

ρθ+1,T (fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT ))|{ξ0 ,...,ξθ ,ξθ∗+1 }

> ρθ+1,T (fθ+1 (ȳθ+1 , ξθ+1 ), . . . , fT (ȳT , ξT ))|{ξ0 ,...,ξθ ,ξθ∗+1 } .

We construct another feasible solution yτ , τ = θ , θ + 1, . . . , T, of problem (7) for t = θ , conditional

∗
on a realization ξ0 , . . . , ξθ of the process: if ξθ+1 = ξθ+1 , let yθ = x∗θ , yτ = ȳτ , τ = θ + 1, . . . , T; if ξθ+1 ∈
∗
Ωθ+1 \ {ξθ+1 }, let yτ = x∗τ , τ = θ , . . . , T. Then for any ξθ+1 ∈ Ωθ+1 , we have

ρθ+1,T (fθ+1 (yθ+1 , ξθ+1 ), . . . , fT (yT , ξT ))|{ξ0 ,...,ξθ ,ξθ +1 }

 ρθ+1,T (fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT ))|{ξ0 ,...,ξθ ,ξθ +1 } ,
∗
when ξθ+1 = ξθ+1 , the above inequality becomes strict. Due to TC2, we have

ρθ,T (fθ (yθ , ξθ ), fθ+1 (yθ+1 , ξθ+1 ), . . . , fT (yT , ξT ))|ξ[0,θ ]

 ρθ,T (fθ (x∗θ , ξθ ), fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT ))|ξ[0,θ ] .
∗
Since ξθ is the immediate predecessor of ξθ+1 , it is easy to know, under the condition (memon), that the
above inequality becomes strict. This contradicts with known conditions of (i) in TC4, therefore, the
assumption is wrong, that is, the condition (i) in TC4 holds.
Next, the mathematical induction method is used to prove that: if TC2 is true, then the condition (ii)
in TC4 holds.
10 of 19 L. YANG ET AL.

When t = T, from 

x∗T ∈ arg min ρT,T (fT (xT , ξT )) ,
xT ∈XT ξ[0,T]

it is easy to deduce
fT (x∗T , ξT )  fT (xT , ξT ), ∀xT ∈ XT .
When t = T − 1, let xT−1 , xT be any feasible solution to problem (7) for t = T − 1, conditional on a
realization ξ0 , . . . , ξT−1 of the data process, then

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ρT−1,T (fT−1 (xT−1 , ξT−1 ), fT (xT , ξT ))|ξ[0,T−1]
 ρT−1,T (fT−1 (xT−1 , ξT−1 ), fT (x∗T , ξT ))|ξ[0,T−1]


 min ρT−1,T (fT−1 (xT−1 , ξT−1 ), fT (x∗T , ξT ))
xT−1 ∈XT−1 ξ[0,T−1]

= ρT−1,T (fT−1 (x∗T−1 , ξT−1 ), fT (x∗T , ξT ))|ξ[0,T−1] .

Therefore, we have proved that x∗T−1 , x∗T determined through (8) is an optimal decision sequence to
problem (7) for t = T − 1, conditional on a realization ξ0 , . . . , ξT−1 of the process.
Suppose that x∗θ+1 , . . . , x∗T derived by (8) is an optimal decision sequence to problem (7) for t =
θ + 1, conditional on a realization ξ0 , . . . , ξθ+1 of the process, we prove x∗θ , x∗θ+1 , . . . , x∗T derived by (8)
is an optimal decision sequence to problem (7) for t = θ , conditional on a realization ξ0 , . . . , ξθ of the
process.
Let xθ , . . . , xT be any feasible solution to problem (7) for t = θ , conditional on a realization ξ0 , . . . , ξθ
of the data process, then

ρθ+1,T (fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT ))|ξ[0,θ +1]

 ρθ+1,T (fθ+1 (xθ+1 , ξθ+1 ), . . . , fT (xT , ξT ))|ξ[0,θ +1] .

This and TC2 imply that

ρθ,T (fθ (xθ , ξθ ), fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT ))|ξ[0,θ ]

 ρθ,T (fθ (xθ , ξθ ), . . . , fT (xT , ξT ))|ξ[0,θ ] ,

so


min ρθ,T (fθ (xθ , ξθ ), fθ+1 (x∗θ+1 , ξθ+1 ), . . . , fT (x∗T , ξT ))
xθ ∈Xθ ξ[0,θ ]


 min ρθ,T (fθ (xθ , ξθ ), . . . , fT (xT , ξT )) ,
xτ ∈Xτ ,τ =θ,...,T ξ[0,θ ]

that is, x∗θ , . . . , x∗T derived by (8) is an optimal decision sequence to problem (7) for t = θ , conditional
on a realization ξ0 , . . . , ξθ of the process. According to the mathematical induction method, for every
θ ∈ H, we have shown that (x∗θ , . . . , x∗T ) derived by (8) is an optimal decision sequence to problem (7)
for t = θ , conditional on a realization ξ0 , . . . , ξθ of the process. Consequently, the condition (ii) in TC4
follows. 
 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 11 of 19

Propositions 1 and 2 tell us that: under the condition (memon), if a generalized convex multi-period
risk measure is time consistent, then the multistage investment optimization problem with this gener-
alized convex multi-period risk measure as the objective function would satisfy the time consistency
of optimal policy. It is worth noting that the condition (ii) in TC4 can be directly deduced from TC2,
namely, the condition (memon) is not needed here. Therefore, if a generalized convex multi-period
risk measure is time consistent, then the corresponding multi-stage optimization problem can be solved
recursively in the backward way.

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4. Construction of the generalized convex multistage risk measure
Choosing a suitable multi-period risk measure is a prerequisite for solving multistage decision problem.
Whether the multi-period risk measure is selected properly or not would affect the reasonability of the
optimal multi-period decisions derived under the multi-period risk measure. From the four properties
in Definition 2.1 that ρt,T , t ∈ H, should satisfy, it is easy to see that any risk measure adopted to make
multi-period decisions should be a generalized convex multi-period risk measure. Time consistency
of multi-period risk measure is a necessary property that any reasonable multi-period risk measure
should satisfy. On the other hand, under the condition (memon), time consistency of optimal policy can
be deduced from time consistency of multi-period risk measure. Considering all these facts, the main
purpose of this section is to explore the general form of a generalized convex multi-period risk measure
satisfying time consistency. Finally, we give four examples of generalized convex single-period risk
measures which can be used to construct generalized convex multi-period risk measures. Accordingly,
the optimal decisions derived from the multistage optimization problem based on the above multi-period
risk measure are time consistent.

Proposition 3 The necessary and sufficient condition for a generalized convex multi-period risk mea-
sure (ρt,T )Tt=0 to satisfy the time consistency of risk measure is that (ρt,T )Tt=0 has the following form

ρT,T (zT ) = zT
(4.1)
ρt,T (zt , . . . , zT ) = zt + φt (zt+1 + φt+1 (zt+2 + · · · + φT−2 (zT−1 + φT−1 (zT )) · · · )),

where (zt , zt+1 , . . . , zT ) ∈ Yt,T , t = 0, 1, 2, . . . , T − 1, and φt : Yt+1 → Yt , t ∈ H \ {T}, satisfies the fol-
lowing properties:

(ozi) φt (0) = 0;
(omon) If y, z ∈ Yt+1 , and y  z, then φt (y)  φt (z);
(ocon) For any y, z ∈ Yt+1 and λ ∈ Yt with λ ∈ [0, 1], φt (λy + (1 − λ)z)  λφt (y) + (1 − λ)φt (z).

Remark 2 Due to Proposition 1, the time consistency of risk measure in Proposition 3 and in what
follows means that any one of TC1, TC2 or TC3 holds.

Proof. If the generalized convex multi-period risk measure (ρt,T )Tt=0 is time consistent, i.e., TC1, TC2
or TC3 holds, then we have from TC3 and (ta) that

ρt,T (zt , zt+1 , . . . , zT ) = ρt,t+1 (zt , ρt+1,T (zt+1 , . . . , zT ))

= zt + ρt,t+1 (0, ρt+1,T (zt+1 , . . . , zT )). (4.2)
12 of 19 L. YANG ET AL.

For any zt+1 ∈ Yt+1 , let φt (zt+1 ) = ρt,t+1 (0, zt+1 ), t ∈ H \ {T}. Since (ρt,T )Tt=0 is a generalized convex
multi-period risk measure, it is easy to deduce from Definition 2.1 that φt : Yt+1 → Yt satisfies (ozi),
(omon) and (ocon). Applying TC3 and (ta) repeatedly to (10), we then have (9). This completes the
proof of the necessary part.
As for the sufficient condition, we have φt : Yt+1 → Yt , t ∈ H \ {T}, it is then easy to see from (9)
that ρt,T : Yt,T → Yt . For any zτ ∈ Yτ , τ = t, t + 1, . . . , T, we have

ρt,T (zt , . . . , zT ) = zt + φt (ρt+1,T (zt+1 , . . . , zT )), t ∈ H \ {T}. (4.3)

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Since the proof of properties (zi), (mon) and (ta) is relatively straightforward, we just prove that
ρt,T (·), t ∈ H \ {T}, satisfies the property (con).
When t = T − 1, for λ ∈ [0, 1], and yτ , zτ ∈ Yτ , τ ∈ {T − 1, T}, we have

ρT−1,T (λ(yT−1 , yT ) + (1 − λ)(zT−1 , zT ))

= λyT−1 + (1 − λ)zT−1 + φT−1 (λyT + (1 − λ)zT )
 λyT−1 + (1 − λ)zT−1 + λφT−1 (yT ) + (1 − λ)φT−1 (zT )
= λρT−1,T (yT−1 , yT ) + (1 − λ)ρT−1,T (zT−1 , zT ).

The above two equalities hold because of (9); the inequality is due to that φT−1 (·) satisfies (ocon).
Therefore, ρT−1,T (·) satisfies (con).
Suppose that for t = θ (θ = 1, 2, . . . , T − 1), any λ ∈ [0, 1] and y, z ∈ Yθ,T , we have

ρθ,T (λy + (1 − λ)z)  λρθ,T (y) + (1 − λ)ρθ,T (z). (4.4)

Then we prove that ρθ−1,T (·) satisfies (con) when t = θ − 1. In fact, for λ ∈ [0, 1] and yτ , zτ ∈ Yτ , τ =
θ − 1, θ , . . . , T, we have

ρθ−1,T (λ(yθ−1 , yθ , . . . , yT ) + (1 − λ)(zθ−1 , zθ , . . . , zT ))

= λyθ−1 + (1 − λ)zθ−1 + φθ−1 (ρθ,T (λ(yθ , . . . , yT ) + (1 − λ)(zθ , . . . , zT )))
 λyθ−1 + (1 − λ)zθ−1 + φθ−1 (λρθ,T (yθ , . . . , yT ) + (1 − λ)ρθ,T (zθ , . . . , zT ))
 λyθ−1 + (1 − λ)zθ−1 + λφθ−1 (ρθ,T (yθ , . . . , yT )) + (1 − λ)φθ−1 (ρθ,T (zθ , . . . , zT ))
= λρθ−1,T (yθ−1 , . . . , yT ) + (1 − λ)ρθ−1,T (zθ−1 , . . . , zT ).

The two equalities here are due to (11). The first inequality relies on (12) and the property (omon), while
the second inequality holds as φθ−1 (·) satisfies (ocon).
By the induction principle, we have shown that, for all t ∈ H \ {T}, ρt,T (·) satisfies (con).
We can derive from (11) and the monotonicity of φt (·) that ρt,T (·) satisfies TC2. It is then known
from Proposition 1 that TC1 and TC3 hold.
By now, we have proved that (ρt,T )Tt=0 constructed through (9) is a generalized convex multi-period
risk measure which satisfies the time consistency of multi-period risk measure and, consequently, satis-
fies properties TC1, TC2 and TC3. 

From (9) and (11), we can see that the risk evaluated at every time and every state is aggre-
gated through the current risk value and the residual risk measurement value, and the value of the
multi-period risk measure in the whole horizon is recursively determined in a backward way. Define
 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 13 of 19

(a) (b)

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Fig. 1. Calculation of a two-period risk measure.

φtω (z) = [φt (z)](ω), here z ∈ Yt+1 , ω ∈ Ft . It is easy to derive from (omon) and (ocon) that: for each
ω ∈ Ft , φtω : Yt+1 → R is monotone and convex. That is, φtω (·) is a generalized convex single-period
risk measure. Monotonicity and convexity are fundamental properties that any reasonable risk measure
should meet. Generalized convex risk measures have much broader applications than coherent or con-
vex risk measures. Especially, if Ft = {∅, Ω}, then y ∈ Yt is constant, and Yt can be treated as the set of
real numbers R. Thus, φt (·) can be seen as a generalized convex single-period risk measure satisfying
(ozi), (omon) and (ocon).
On the other hand, given a functional ρ : Y → R, where Y is a linear space formed by
F−measurable functions on (Ω, F, P). If ρ(z), z ∈ Y, satisfies the following three properties (szi),
(smon) and (scon), then ρ(z) is called a real-valued generalized convex single-period risk measure.

(szi) ρ(0) = 0;
(smon) If y, z ∈ Y and y  z, then ρ(y)  ρ(z);
(scon) For any y, z ∈ Y and λ ∈ [0, 1], ρ(λy + (1 − λ)z)  λρ(y) + (1 − λ)ρ(z).

To extend the real-valued generalized convex single-period risk measure ρ(·) to the multi-period
case with respect to the filtration {Ft }t∈H , we define φt (·) = ρ(·|Ft ), t ∈ H \ {T}, similarly to that in
Geman & Ohana (2008) and other papers. It is easy to verify that φt (·) is well defined and satisfies
properties (ozi), (omon) and (ocon). Therefore, if we plug φt (·), t ∈ H \ {T}, into (9), it is then known
from Proposition 3 that (ρt,T )Tt=0 is a generalized convex multi-period risk measure satisfying the time
consistency of multi-period risk measure.
To illustrate how to calculate ρt,T (zt , . . . , zT ) defined in (9) in a backward way, we consider a random
process (z0 , z1 , z2 ) ∈ Y0,2 described by the two-stage tree in Fig. 1(a). The numbers beside the nodes of
the tree are losses, the numbers on the branches are branch occurring probabilities. The current loss at
time 0 is 5. To compute ρ0,2 (z0 , z1 , z2 ), we first calculate ρ1,2 (z1 , z2 ) = z1 + φ1 (z2 ) for each sub-tree at
time t = 1. Applying φ1 (z2 ) = E[z2 |F1 ] yields 1, 2 and 3 for the three sub-trees in turn. We then add these
numbers to the losses at time 1, as shown in Fig. 1b. Applying φ0 (z1 + φ1 (z2 )) = E[z1 + φ1 (z2 )|F0 ]
14 of 19 L. YANG ET AL.

Table 1 The values and probabilities of port-

folios y and z under different samples

T =1 T =2 T =3
ω p(ω) y z
ω1 0.02 8 8
ω2 0.03 6 6
ω3 0.90 2 5

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ω4 0.05 1 3

yields (0 + 1) · 1/3 + (1 + 2) · 1/3 + (2 + 3) · 1/3 = 3, and adding this number to the loss 5 at time
t = 0 finally yields 8, which is the value of ρ0,2 (z0 , z1 , z2 ), please see Fig. 1b.
Then, what conditions should ρ(·) satisfy so that the optimal policy based on (ρt,T )Tt=0 is time con-
sistent? Before answering this question, we first introduce the following property:

(emon) For y, z ∈ Y, if y  z, and there exists some ω∗ ∈ Ω with P(ω∗ ) > 0 such that y(ω∗ ) <
z(ω∗ ), then ρ(y) < ρ(z).

If ρ(·) is a real-valued generalized convex single-period risk measure which satisfies (emon), then
ρ(·) can capture the subtle change of the investment risk. (emon) means that ρ(·) is strictly monotone,
and globally considers the risk measurement of the loss distribution. Many existing single-period risk
measures, such as CVaRα (Rockafellar & Uryasev, 2002), TNTα (Chen et al., 2012) and WESα (Chen
& Yang, 2011) 1 , here α < 1, do not satisfy this property, because these risk measures only pay attention
to the partial information of the loss distribution. To illustrate this, we consider a simple example with
only four samples, the concrete data is shown in Table 1. It is easy to see from Table 1 that y  z and
y(ω3 ) < z(ω3 ) with P(ω3 ) > 0, also y(ω4 ) < z(ω4 ) with P(ω4 ) > 0, namely, y and z satisfy the condi-
tion in (emon). However, CVaR0.05 (y) = CVaR0.05 (z), and the same conclusion holds for WES0.05 and
TNT0.05 , which contradict with the conclusion of (emon). Based on the loss distributions of y and z, any
rational investor will select y to invest. This shows that, if a risk measure only pays attention to partial
information of the loss distribution, it would not be competent for ranking finely on different portfo-
lio risks. Therefore, a competitive optimal strategy can only be derived from the risk measure which
satisfies (emon).
Demonstrated in Chen et al. (2012) are the favorable financial and mathematical properties of TNTα .
Moreover, TNTα satisfies the property (emon) as long as α = 1.
It is not difficult to show the following conclusion:
Proposition 4 Suppose ρ(·) is a real-valued generalized convex single-period risk measure, and
(ρt,T )Tt=0 is constructed through (9), where φt (·) = ρ(·|Ft ), t ∈ H \ {T}. Then (ρt,T )Tt=0 satisfies the prop-
erty (memon) if and only if ρ(·) satisfies the property (emon).
This proposition and Proposition 3 tell us that: if ρ(·) is a real-valued generalized convex single-
period risk measure satisfying (emon), then (ρt,T )Tt=0 constructed through formula (9), where φt (·) =

1 For the random loss −z ∈ Y, TNT (z) = α −1 (E[w(z)1

α {zzα } ] − w(zα )(P[z  zα ] − α)), where zα = inf{v ∈ R :
P[z  v] > α}, and w(·) is a positive, monotonically decreasing convex real-valued continuous function. CVaRα (z) = TNTα (z)
when w(z) = −z. WESα (z) = α −1 (φ(zα )zα (P[z  zα ] − α) − E[φ(z)z1{zzα } ]), where φ(z) is a monotonically non-increasing
function of z. Moreover, φ(z) is positive and convex for z  0 and is non-negative and concave for z > 0.
 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 15 of 19

ρ(·|Ft ), t ∈ H \ {T}, satisfies both the time consistency of multi-period risk measure and (memon).
Furthermore, combining the above facts with Proposition 2, we can deduce that the optimal decisions
based on (ρt,T )Tt=0 satisfy the time consistency of optimal policy.
We would like to emphasize here that, all the above demonstrations tell us at least three facts: first,
the form of the generalized convex multi-period risk measure satisfying the time consistency of risk
measure should be the form specified by (9), where φt (·) = ρ(·|Ft ), t ∈ H \ {T}, and ρ(·) is a real-
valued generalized convex single-period risk measure; secondly, the multi-period risk measure (ρt,T )Tt=0
constructed from any real-valued generalized convex single-period risk measure ρ(·) according to (9)

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not only satisfies the time consistency of risk measure but also is generalized convex; thirdly, if the
generalized convex single-period risk measure ρ(·) used to construct (ρt,T )Tt=0 satisfies (emon), then
the optimal investment decisions based on (ρt,T )Tt=0 satisfy the time consistency of optimal investment
policy.
Having the above theoretical support, it becomes easy for investors to construct suitable multi-
period risk measures in practice according to their risk-averse degree and different market environments.
Investors may select different generalized convex single-period risk measures, such as two-sided coher-
ent risk measures (Chen & Wang, 2008), the unilateral p moment risk measure (Fischer, 2003; Rock-
afellar et al., 2006) and TNTα , to construct a generalized convex multi-period risk measure (ρt,T )Tt=0
through the formula (9). The multi-period risk measures (ρt,T )Tt=0 constructed from the above gener-
alized convex single-period risk measures satisfy the time consistency of risk measure. If investors
further require the optimal investment decisions derived by (ρt,T )Tt=0 satisfy the time consistency of
optimal policy, then some limitation on parameters in the above single-period risk measures should be
added.
The main difference between the multi-period risk measure framework proposed in this paper and
those in the literature is that: we do not require the single-period risk measure used to construct a multi-
period risk measure satisfies the translation invariance. Relaxation of this condition is more consistent
with the actual requirements of real financial markets. Further, the generalized convex single-period
risk measures having good properties, such as TNTα , can be directly used to construct reasonable and
time consistent multi-period risk measures. By selecting appropriate parameters, the generalized con-
vex multi-period risk measure constructed from the generalized convex single-period risk measure can
flexibly reflect the investor’s degree of risk aversion and control the fat-tail phenomenon of the loss
distribution when it is used to select the optimal investment policy.
In the following, four examples are used to illustrate how to construct a generalized convex multi-
period risk measure from the existing generalized convex single-period risk measure, and how to ensure
the generated multi-period risk measure satisfying the time consistency of risk measure or both the time
consistency of risk measure and the time consistency of optimal policy.

Example 1 Expectation (risk neutral) risk measure ρ(z) = E[z].

Let

φt (zt+1 ) = E[zt+1 |Ft ]. (4.5)

Because of the tower property of conditional expectation, it is easy to prove that the resulting multi-
period risk measure (9) constructed from (13) can be written as:

ρt,T (zt , . . . , zT ) = E[zt + zt+1 + · · · + zT |Ft ], t ∈ H \ {T}.

16 of 19 L. YANG ET AL.

Example 2 ρ(z) = loga E[az ], a > 0 and a = | 1.

Let
φt (zt+1 ) = loga E[azt+1 |Ft ]. (4.6)
From the properties of the logarithmic function and exponential function, it is easy to deduce that the
resulting multi-period risk measure (9) constructed by (14) can be written in the following form:

ρt,T (zt , . . . , zT ) = loga E[azt +zt+1 +···+zT |Ft ], t ∈ H \ {T}.

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Example 3 The TNTα (z) risk measure in Chen et al. (2012).
Suppose TNTα (z) satisfies (szi), otherwise, we can ensure (szi) by simply letting TNTα (z) =
TNTα (z) − TNTα (0), then TNTα (z) is a real-valued generalized convex risk measure. It is easy to
see from the relationship between the translated TNTα (z) and the original TNTα (z) that the translated
TNTα (z) retains the good properties of the original TNTα (z). Let
1
φt (zt+1 ) = TNTα (zt+1 |Ft ) = min ξ + E[(w(zt+1 ) − ξ )+ |Ft ],
ξ ∈Yt α

then the multi-period risk measure (ρt,T )Tt=0 composed from φt (·) satisfies the time consistency of risk
measure. Moreover, we can construct different generalized convex multi-period risk measure (ρt,T )Tt=0 s
by selecting proper nonlinear convex weight function w(·)s. If ω(z) = z, then TNTα (z) = CVaRα (z)
would be used to construct (ρt,T )Tt=0 through (9), which is time consistent.
The generalized convex multi-period risk measure (ρt,T )Tt=0 constructed from TNTα (z) satisfies the
time consistency of risk measure. From Propositions 2 and 4, we know that if TNTα (z) satisfies (emon),
then the optimal decisions based on (ρt,T )Tt=0 are time consistent, and the corresponding multistage
investment optimization problem can be solved recursively. If α = 1, it is easy to prove that TNTα (z)
satisfies (emon), consequently, the (ρt,T )Tt=0 constructed from TNT1 (z) is time consistent and the optimal
decisions derived under (ρt,T )Tt=0 also satisfies the time consistency of optimal policy. The following
example corresponds to ω(z) = (c0 + z)γ (γ > 1) and α = 1.
Example 4 ρ(z) = E[(c0 + z)γ ], where γ > 1 and c0 is a large constant.
The multi-period risk measures constructed from TNT1 (z) are risk-averse, they can flexibly reflect
the investor’s degree of risk aversion by selecting proper ω(z). Also, the optimal decisions obtained
from the multistage portfolio selection problem with one of the above generalized convex multi-period
risk measures as the objective function would satisfy the time consistency of optimal policy. What
is more important from the practical point of view, the corresponding multi-stage portfolio selection
problem can be solved in a recursive way.

5. Conclusions
Through discussing necessary properties that a reasonable multi-period risk measure should satisfy,
we introduce a class of generalized convex multi-period risk measures. It is convenient to study the
time consistency of risk measure under this kind of multi-period risk measures, since the existing def-
initions about the time consistency of risk measure are then equivalent. Moreover, we show that the
time consistent generalized convex multi-period risk measure can ensure the time consistency of the
optimal policy derived under the multi-period risk measure. We derive the concrete recursive form of
the generalized convex multi-period risk measure and show how to construct the generalized convex
 TIME CONSISTENT GENERALIZED CONVEX RISK MEASURE 17 of 19

multi-period risk measure from existing generalized convex single-period risk measures. Especially, the
corresponding multistage portfolio selection problem under the generalized convex multi-period risk
measure can be solved recursively. All these results are helpful for us to understand and examine the
time consistency of multi-period risk measure and/or optimal investment policy, and are useful for us to
construct reasonable multi-period risk measures and to solve the resulting multi-stage portfolio selection
problem.
As for the future study, it is worthwhile constructing other practical, risk-averse generalized convex
multi-period risk measures in order to suitably reflect the investor’s degree of risk aversion and to find

Downloaded from http://imaman.oxfordjournals.org/ at University of West Florida Libraries on June 6, 2016

robust, time consistent optimal investment strategy; meanwhile, it is also worthy to apply the time
consistent generalized convex multi-period risk measure to the multi-stage portfolio selection problem
and to show its practicality and efficiency by comparing the obtained optimal investment strategy with
those obtained under other multi-period risk measures.

Acknowledgement
The authors are grateful to four anonymous referees, the associate editor and the editor for their valu-
able comments, which have been of great help in improving the paper significantly in both content
and style.

Funding
This work was supported by the National Natural Science Foundation of China (Grant Numbers
70971109, 71371152, 11461008 and 11326204), Research Project of the Humanities and Social Sci-
ences of Guangxi Education Department (Grant Number LX2014046), the Natural Science Foundation
of Guangxi Normal University (Key Project), the Scientific Research Foundation of Guangxi Normal
University for Doctor and the Fundamental Research Funds for the Central Universities (Grant Number
08143032).

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