Evaluating Portfolio Policies: A Duality Approach

Martin B. Haugh (), Leonid Kogan and Jiang Wang ()
Additional contact information
Martin B. Haugh: Department of Industrial Engineering and Operations Research, Columbia University, New York, New York 10027
Jiang Wang: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142, and CCFR and NBER

Operations Research, 2006, vol. 54, issue 3, 405-418

Abstract: The performance of a given portfolio policy can in principle be evaluated by comparing its expected utility with that of the optimal policy. Unfortunately, the optimal policy is usually not computable, in which case a direct comparison is impossible. In this paper, we solve this problem by using the given portfolio policy to construct an upper bound on the unknown maximum expected utility. This construction is based on a dual formulation of the portfolio optimization problem. When the upper bound is close to the expected utility achieved by the given portfolio policy, the potential utility loss of this policy is guaranteed to be small. Our algorithm can be used to evaluate portfolio policies in models with incomplete markets and position constraints. We illustrate our methodology by analyzing the static and myopic policies in markets with return predictability and constraints on short sales and borrowing.

Keywords: finance; portfolio; optimal control; applications (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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http://dx.doi.org/10.1287/opre.1060.0279 (application/pdf)

Related works:
Working Paper: Evaluating Portfolio Policies: A Duality Approach (2003)
Working Paper: Evaluating Portfolio Policies: A Duality Approach (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:54:y:2006:i:3:p:405-418

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