Better than pre-commitment optimal mean-variance portfolio allocation: a semi-self-financing Hamilton-Jacobi-Bellman approach

Dang, Duy-Minh and Forsyth, Peter (2015) Better than pre-commitment optimal mean-variance portfolio allocation: a semi-self-financing Hamilton-Jacobi-Bellman approach. European Journal of Operational Research, 250 3: 827-841. doi:10.1016/j.ejor.2015.10.015

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Author Dang, Duy-Minh
Forsyth, Peter
Title Better than pre-commitment optimal mean-variance portfolio allocation: a semi-self-financing Hamilton-Jacobi-Bellman approach
Journal name European Journal of Operational Research   Check publisher's open access policy
ISSN 0377-2217
1872-6860
Publication date 2015-01-01
Sub-type Article (original research)
DOI 10.1016/j.ejor.2015.10.015
Open Access Status Not Open Access
Volume 250
Issue 3
Start page 827
End page 841
Total pages 15
Place of publication Amsterdam, Netherlands
Publisher Elsevier
Collection year 2016
Language eng
Abstract We generalize the idea of semi-self-financing strategies, originally discussed in Ehrbar (1990), and later formalized in Cui et al (2012), for the pre-commitment mean-variance (MV) optimal portfolio allocation problem. The proposed semi-self-financing strategies are built upon a numerical solution framework for Hamilton–Jacobi–Bellman equations, and can be readily employed in a very general setting, namely continuous or discrete re-balancing, jump-diffusions with finite activity, and realistic portfolio constraints. We show that if the portfolio wealth exceeds a threshold, an MV optimal strategy is to withdraw cash. These semi-self-financing strategies are generally non-unique. Numerical results confirming the superiority of the efficient frontiers produced by the strategies with positive cash withdrawals are presented. Tests based on estimation of parameters from historical time series show that the semi-self-financing strategy is robust to estimation ambiguities.
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: School of Mathematics and Physics
Official 2016 Collection
 
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Created: Fri, 09 Oct 2015, 09:01:36 EST by Duy-minh Dang on behalf of Mathematics