MULTI-ASSET PORTFOLIO OPTIMIZATION WITH STOCHASTIC SHARPE RATIO UNDER DRAWDOWN CONSTRAINT

Subhojit Biswas, Saif Jawaid () and Diganta Mukherjee ()
Additional contact information
Subhojit Biswas: Indian Statistical Institute, Kolkata, India
Saif Jawaid: Indian Statistical Institute, Kolkata, India
Diganta Mukherjee: Sampling and Official Statistics Unit, Indian Statistical Institute, Kolkata, India

Annals of Financial Economics (AFE), 2020, vol. 15, issue 01, 1-33

Abstract: We consider an investor who seeks to maximize his expected utility of the portfolio, consisting of multiple risky assets and one risk-free asset, derived from the terminal wealth relative to the maximum wealth achieved over a fixed time horizon. This is achieved under a portfolio draw down constraint, in a market with local stochastic volatility. In empirical application, considering two risky assets, the assets have been identified with the help of pairs trading. In the absence of closed form solution of the value function and the optimal strategy, we obtain the approximates of these quantities using coefficient series expansion techniques and finite difference schemes. We utilize the risk tolerance factor function to ease our approximations of this value functions and the strategies. All the parameters were estimated from the triplets and used to illustrate and compare the stochastic volatility with the constant volatility situation, and how an investor can deploy different portfolio plans.

Keywords: Portfolio optimization; drawdown; stochastic volatility; local volatility (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010495220800019
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:afexxx:v:15:y:2020:i:01:n:s2010495220800019

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010495220800019

Access Statistics for this article

Annals of Financial Economics (AFE) is currently edited by Michael McAleer

More articles in Annals of Financial Economics (AFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().