Multi-period mean–variance portfolio selection with regime switching and a stochastic cash flow

Huiling Wu and Zhongfei Li

Insurance: Mathematics and Economics, 2012, vol. 50, issue 3, 371-384

Abstract: This paper investigates a non-self-financing portfolio optimization problem under the framework of multi-period mean–variance with Markov regime switching and a stochastic cash flow. The stochastic cash flow can be explained as capital additions or withdrawals during the investment process. Specially, the cash flow is the surplus process or the risk process of an insurer at each period. The returns of assets and amount of the cash flow all depend on the states of a stochastic market which are assumed to follow a discrete-time Markov chain. We analyze the existence of optimal solutions, and derive the optimal strategy and the efficient frontier in closed-form. Several special cases are discussed and numerical examples are given to demonstrate the effect of cash flow.

Keywords: Regime switching; Mean–variance portfolio selection; Efficient frontier; Non-self-financing; Stochastic cash flow; Dynamic programming (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:50:y:2012:i:3:p:371-384

DOI: 10.1016/j.insmatheco.2012.01.003

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