Worst-Case Approach To Strategic Optimal Portfolio Selection Under Transaction Costs And Trading Limits

Nikolay Andreev

HSE Working papers from National Research University Higher School of Economics

Abstract: We study a worst-case scenario approach to the stochastic dynamic programming problem, presenting a general probability-based framework and some properties of the arising Bellman-Isaacs equation which allow to obtain a closed-form analytic solution. We also adapt the results for a discrete financial market and the problem of strategic portfolio selection in the presence of transaction costs and trading limits with unspecified stochastic process of market parameters. Unlike the classic stochastic programming, the approach is model-free while the solution can be easily found numerically under economically reasonable assumptions. All results hold for a general class of utility functions and several risky assets. For a special case of proportional transaction costs and CRRA utility, we present a numerical scheme which allows to reduce the dimensionality of the Bellman-Isaacs equation by a number of risky assets. The results of the research have been revised and published in Andreev, N. (2019). Robust portfolio optimization in an illiquid market in discrete-time. Mathematics, 7(12), 1147

Keywords: portfolio selection; bellman equation; stochastic dynamic programming; transaction costs; worst-case scenario (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
New Economics Papers: this item is included in nep-cmp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in WP BRP Series: Financial Economics / FE, May 2015, pages - 46

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