Discrete-time portfolio optimization under maximum drawdown constraint with partial information and deep learning resolution

Carmine De Franco, Johann Nicolle and Huy\^en Pham

Papers from arXiv.org

Abstract: We study a discrete-time portfolio selection problem with partial information and maxi\-mum drawdown constraint. Drift uncertainty in the multidimensional framework is modeled by a prior probability distribution. In this Bayesian framework, we derive the dynamic programming equation using an appropriate change of measure, and obtain semi-explicit results in the Gaussian case. The latter case, with a CRRA utility function is completely solved numerically using recent deep learning techniques for stochastic optimal control problems. We emphasize the informative value of the learning strategy versus the non-learning one by providing empirical performance and sensitivity analysis with respect to the uncertainty of the drift. Furthermore, we show numerical evidence of the close relationship between the non-learning strategy and a no short-sale constrained Merton problem, by illustrating the convergence of the former towards the latter as the maximum drawdown constraint vanishes.

Date: 2020-10, Revised 2020-10
New Economics Papers: this item is included in nep-big and nep-upt
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