Near-optimal asset allocation in financial markets with trading constraints

Thijs Kamma and Antoon Pelsser

European Journal of Operational Research, 2022, vol. 297, issue 2, 766-781

Abstract: We develop a dual-control method for approximating investment strategies in multidimensional financial markets with convex trading constraints. The method relies on a projection of the optimal solution to an (unconstrained) auxiliary problem to obtain a feasible and near-optimal solution to the original problem. We obtain lower and upper bounds on the optimal value function using convex duality methods. The gap between the bounds indicates the precision of the near-optimal solution. We illustrate the effectiveness of our method in a market with different trading constraints such as borrowing, short-sale constraints and non-traded assets. We also show that our method works well for state-dependent utility functions.

Keywords: Finance; Convex duality; Incomplete markets; Stochastic optimal control; Utility maximisation (search for similar items in EconPapers)
JEL-codes: D52 D53 G11 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:297:y:2022:i:2:p:766-781

DOI: 10.1016/j.ejor.2021.06.029

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