DYNAMIC SHORTFALL CONSTRAINTS FOR OPTIMAL PORTFOLIOS
2010
We consider a portfolio problem when a Tail Conditional Expectation constraint is imposed. The financial market is composed of n risky assets driven by geometric Brownian motion and one risk-free asset. The Tail Conditional Expectation is calculated for short intervals of time and imposed as risk constraint dynamically. The method of Lagrange multipliers is combined with the Hamilton-Jacobi-Bellman equation to insert the constraint into the resolution framework. A numerical method is applied to obtain an approximate solution to the problem. We find that the imposition of the Tail Conditional Expectation constraint when risky assets evolve following a log- normal distribution, curbs investment in the risky assets and diverts the wealth to consumption.
Keywords:
- Log-normal distribution
- Lagrange multiplier
- Portfolio optimization
- Hamilton–Jacobi–Bellman equation
- Financial economics
- Mathematical optimization
- Normal distribution
- Geometric Brownian motion
- Economics
- Conditional expectation
- Portfolio
- Mathematical economics
- Numerical analysis
- approximate solution
- Financial market
- Correction
- Source
- Cite
- Save
- Machine Reading By IdeaReader
20
References
9
Citations
NaN
KQI