A discrete-time benchmark tracking problem in two markets subject to random environments

Héctor Jasso-Fuentes () and Gladys D. Salgado-Suárez ()
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Héctor Jasso-Fuentes: CINVESTAV-IPN
Gladys D. Salgado-Suárez: CINVESTAV-IPN

OR Spectrum: Quantitative Approaches in Management, 2024, vol. 46, issue 4, No 8, 1265-1294

Abstract: Abstract In this manuscript, we study a benchmark tracking problem when prices evolve through a Binomial model with a random environment. The agent invests a given fund’s capital into different assets in a predetermined market to replicate at each stage of time a financial index or benchmark. To measure the actual deviation between the agent’s wealth and the current benchmark, we apply a deviation error expressed as a total sum of quadratic functions. We also assume the agent is obligated to change her/his investment between two markets when it is mandatory. This obligation happens when the fund’s wealth falls down a predetermined bankruptcy barrier. The dynamic programming method is then used to get optimal investment strategies that minimize the deviation error as well as to characterize the minimum deviation. We also apply the so-called potential function to analyze the influence of the environment on the prices. Numerical simulations are provided to illustrate our results.

Keywords: Decision processes; Benchmark tracking problems; Random walks; Random environment; 91G15; 82B41; 60K37; 90C40; 93C30 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00291-024-00767-x

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