Abstract
The paper aims to solve the asset allocation problem of a loss-averse commercial bank in an environment with macroeconomic risks where inflation rates obey a mean-reverting process. The bank has only partial information about the appreciation rate of inflation. Its risk preference is described using an S-shaped utility function and then a semi-analytical investment strategy is derived through the filtering theory and inverse Fourier Transformation method. The paper finds that the investment proportion which decreases with a higher degree of information incompleteness is positively correlated with inflation risks and has a close but not monotonic relationship with the reference point.
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