Better than pre-commitment mean-variance portfolio allocation strategies: A semi-self-financing Hamilton–Jacobi–Bellman equation approach

Dang, Duy-Minh

doi:10.1016/j.ejor.2015.10.015

Cited by 71 publications

(31 citation statements)

References 26 publications

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“…Introducing an investment target for a pre-commitment strategy is not new, see, for example, Cui et al (2012) and Dang and Forsyth (2016). Prescribing an investment target in a time-consistent strategy has however, to our knowledge, not yet been pursued.…”

Section: Hybrid Strategy: Time-consistent With a Determined Targetmentioning

confidence: 99%

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On pre-commitment aspects of a time-consistent strategy for a mean-variance investor

Cong

Oosterlee

2016

Journal of Economic Dynamics and Control

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a b s t r a c tIn this paper, a link between a time-consistent and a pre-commitment investment strategy is established. We define an implied investment target, which is implicitly contained in a time-consistent strategy at a given time step and wealth level. By imposing the implied investment target at the initial time step on a time-consistent strategy, we form a hybrid strategy which may generate better mean-variance efficient frontiers than the time-consistent strategy. We extend the numerical algorithm proposed in Cong and Oosterlee (2016b) to solve constrained time-consistent mean-variance optimization problems. Since the time-consistent and the pre-commitment strategies generate different terminal wealth distributions, time-consistency is not always inferior to pre-commitment.

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Section: Hybrid Strategy: Time-consistent With a Determined Targetmentioning

confidence: 99%

“…Mathematically, intermediate targets can be introduced to a time-consistent strategy in a similar way as done in Dang and Forsyth (2016), where intermediate targets are introduced to a pre-commitment strategy. The definition of the hybrid strategy is as follows.…”

Section: Hybrid Strategy: Time-consistent With a Determined Targetmentioning

confidence: 99%

On pre-commitment aspects of a time-consistent strategy for a mean-variance investor

Cong

Oosterlee

2016

Journal of Economic Dynamics and Control

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“…Analogous to the graphical analysis of Dang and Forsyth (2016), we assess optimal portfolio allocations subject to realistic budget constraints under multiple illiquid market scenarios, in order to show the flexibility and adequacy of the proposed copula-LVaR portfolio optimization approach. We also use the regulatory parameterisation of daily VaR estimates as the benchmark in our analysis.…”

Section: Analysis Of Optimal Portfolios and Efficient Frontiersmentioning

confidence: 99%

Multivariate dependence and portfolio optimization algorithms under illiquid market scenarios

Janabi

Hernández

Berger

et al. 2017

European Journal of Operational Research

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We propose a model for optimizing structured portfolios with liquidity-adjusted Value-at-Risk (LVaR) constraints, whereby linear correlations between assets are replaced by the multivariate nonlinear dependence structure based on Dynamic Conditional Correlation t-copula modeling. Our portfolio optimization algorithm minimizes the LVaR function under adverse market circumstances and multiple operational and financial constraints. When we consider a diversified portfolio of international stock and commodity market indices under multiple realistic portfolio optimization scenarios, the obtained results consistently show the superiority of our approach relative to other competing portfolio strategies including the minimum-variance, risk-parity and equally weighted portfolio allocations.

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“…The Hamilton-Jacobi-Bellman (HJB) equation is a fundamental issue for the intertemporal economic problems under uncertainty, such as investment and portfolio decisions problem, [1][2][3][4] life insurance problem, [5][6][7][8] and the loss-carry-forward tax problem. 9,10 In most of the intertemporal decision models, HJB equations are the prerequisites to obtain the optimal choices.…”

Section: Introductionmentioning

confidence: 99%

An equivalent approximation approach for the Hamilton‐Jacobi‐Bellman equations in intertemporal decision problems

Xiang

Chen

2018

Optim Control Appl Methods

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In this paper, we develop an equivalent approximation approach to obtain the Hamilton-Jacobi-Bellman (HJB) equations of intertemporal decision problems under uncertainty. An implicit discount function is adopted in the derivation of the rate of change of value function for the HJB equations to provide the broadest coverage of time preferences. Meanwhile, we provide an illustrative example for application by revisiting the intertemporal consumption and portfolio decisions problem. Furthermore, we verify the validity of our approach in robustness tests by incorporating exponential, nonconstant, and stochastic hyperbolic discounting functions, respectively. The HJB equations and their resulting decision rules in the finite and infinite planning horizons have confirmed that our approach provides an efficient and reliable alternative to acquire the HJB equations in the intertemporal economic issues under uncertainty. KEYWORDS equivalent approximation, HJB equation, intertemporal decision, time inconsistency 1976

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Better than pre-commitment mean-variance portfolio allocation strategies: A semi-self-financing Hamilton–Jacobi–Bellman equation approach

Cited by 71 publications

References 26 publications

On pre-commitment aspects of a time-consistent strategy for a mean-variance investor

On pre-commitment aspects of a time-consistent strategy for a mean-variance investor

Multivariate dependence and portfolio optimization algorithms under illiquid market scenarios

An equivalent approximation approach for the Hamilton‐Jacobi‐Bellman equations in intertemporal decision problems

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