Multi-Period Mean-Absolute Deviation Fuzzy Portfolio Selection Model with Entropy Constraints

Zhang Peng (), Gong Heshan and Lan Weiting
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Zhang Peng: School of Economics, Wuhan University of Technology, Wuhan430070, China
Gong Heshan: School of Economics, Wuhan University of Technology, Wuhan430070, China
Lan Weiting: School of Economics, Wuhan University of Technology, Wuhan430070, China

Journal of Systems Science and Information, 2017, vol. 4, issue 5, 428-443

Abstract: This paper considers a multi-period fuzzy portfolio selection problem maximizing the terminal wealth imposed by risk control, in which the returns of assets are characterized by fuzzy numbers. A fuzzy absolute deviation is originally defined as the risk control of portfolio. Entropy constraints and borrowing constraints are added in the portfolio selection model. Based on the theories of possibility measures, a new multi-period portfolio optimization model with transaction costs is proposed. And then, the proposed model is transformed into a crisp nonlinear programming problem by using fuzzy programming approach. Because of the transaction costs, the multi-period portfolio selection is the dynamic optimization problem with path dependence. Through changing the cost function into a variable, the multi-period portfolio selection is approximately turned into the dynamic programming. Furthermore, the discrete approximate iteration method is designed to obtain the optimal portfolio strategy. Finally, an example is given to illustrate the behavior of the proposed model and the designed algorithm using real data from the Shanghai Stock Exchange.

Keywords: multi-period fuzzy portfolio selection; mean absolute deviation; transaction costs; entropy constraints; discrete approximate iteration method (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:jossai:v:4:y:2017:i:5:p:428-443:n:4

DOI: 10.21078/JSSI-2016-428-16

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