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Computational Economics

, Volume 28, Issue 2, pp 113–137 | Cite as

The Impact of Short-Sale Constraints on Asset Allocation Strategies via the Backward Markov Chain Approximation Method

  • Carl Chiarella
  • Chih-Ying Hsiao
Article
  • 43 Downloads

Abstract

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.

Keywords

asset allocation stochastic optimal control short sale constraints inflation risk Markov chain approximation 

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Copyright information

© Springer Science+Business Media, Inc. 2006

Authors and Affiliations

  • Carl Chiarella
    • 1
  • Chih-Ying Hsiao
    • 1
    • 2
  1. 1.School of Finance and EconomicsUniversity of TechnologySydneyAustralia
  2. 2.University of BielefeldBielefeldGermany

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