The Impact of Short-Sale Constraints on Asset Allocation Strategies via the Backward Markov Chain Approximation Method
- 43 Downloads
This paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous-time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be obtained analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on these decisions.
Keywordsasset allocation stochastic optimal control short sale constraints inflation risk Markov chain approximation
Unable to display preview. Download preview PDF.
- Camilli, F. and Falcone, M. (1995). An approximation scheme for the optimal control of diffusion processes. Mathematical Modelling and Numerical Analysis, 25(1), 97–122.Google Scholar
- Gruene, L. Numerik Optimaler Steuerung, Internet, http://www.math.unifrankfurt.de/numerik/lehre/gruene/optctrl01/.
- Hsiao, C.-Y., Chiarella, C. and Semmler, W. (2005). Strategic Asset Allocation with Investment in Inflation-Indexed Bonds, Working Paper, University of Bielefeld.Google Scholar
- Kamien, M.I. and Schwartz, N.L. (1991), Dynamic Optimization, North-Holland.Google Scholar
- Kloeden, P.E. and Platen, E. (1992). Numerical Solution of Stochastic Differential Equations, Springer.Google Scholar
- Kushner, H.J. (1977). Probability methods for approximations in stochastic control and for ellipic equations, Academic Press, New York.Google Scholar
- Liu, J. (2005). Portfolio Selection in Stochastic Environments, Stanford GSB Working Papers.Google Scholar
- Oksendal, B. (2000). Stochastic Differential Equations, 6th. ed., Springer.Google Scholar