Worst-Case Approach to Strategic Optimal Portfolio Selection Under Transaction Costs and Trading Limits
Author | : Nikolay Andreev |
Publisher | : |
Total Pages | : 54 |
Release | : 2016 |
ISBN-10 | : OCLC:1306259460 |
ISBN-13 | : |
Rating | : 4/5 (60 Downloads) |
Book excerpt: We study a worst-case scenario approach to the stochastic dynamic programming problem, presenting a general probability-based framework and some properties of the arising Bellman-Isaacs equation which allow to obtain a closed-form analytic solution. We also adapt the results for a discrete financial market and the problem of strategic portfolio selection in the presence of transaction costs and trading limits with unspecified stochastic process of market parameters. Unlike the classic stochastic programming, the approach is model-free while the solution can be easily found numerically under economically reasonable assumptions. All results hold for a general class of utility functions and several risky assets. For a special case of proportional transaction costs and CRRA utility, we present a numerical scheme which allows to reduce the dimensionality of the Bellman-Isaacs equation by a number of risky assets.