Dynamic optimal portfolio choice in a jump-diffusion model with investment constraints
Xing Jin and
Kun Zhang ()
Journal of Banking & Finance, 2013, vol. 37, issue 5, 1733-1746
We consider the dynamic portfolio choice problem in a jump-diffusion model, where an investor may face constraints on her portfolio weights: for instance, no-short-selling constraints. It is a daunting task to use standard numerical methods to solve a constrained portfolio choice problem, especially when there is a large number of state variables. By suitably embedding the constrained problem in an appropriate family of unconstrained ones, we provide some equivalent optimality conditions for the indirect value function and optimal portfolio weights. These results simplify and help to solve the constrained optimal portfolio choice problem in jump-diffusion models. Finally, we apply our theoretical results to several examples, to examine the impact of no-short-selling and/or no-borrowing constraints on the performance of optimal portfolio strategies.
Keywords: Optimal portfolio choice; Portfolio constraints; Jump-diffusion process; Martingale-duality approach (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:5:p:1733-1746
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