Dynamically optimal portfolio selection with frictions and portfolio constraints

Abstract

costs and initial wealth allocations. Our numerical example shows that the initial wealth allocation between the risk-free and risky assets affects the efficient frontier and the efficient frontier is distorted by the transaction costs. Moreover, the buying and selling rates have different impacts on the efficient frontier for different regions. We also examine how the width of the no-transaction region varies with different transaction cost rates.Second, we study the behavioural portfolio optimization. Beyond the meanvariance portfolio theory, prospect theory has been proposed as a descriptive model of economic behaviour under risk. We formulate the S-shaped utility maximization model under prospect theory and consider multi-period behavioural portfolio selection problem in a cone-constrained market. We consider the following two cases: (1) the case with one risky asset and no shorting constraint; and (2) the case with multiple elliptically distributed risky assets and cone constraints. We derive semi-closed form solutions of the optimal investment policy for both cases. Numerically, we illustrate the properties of the optimal policy by depicting the corresponding S-shaped utility curves, from which we investigate how the constraints in the market affect the investor's behaviour.Finally, the thesis is concluded, together with the discussion on promising future research directions. AcknowledgementFinally, thank my parents for their unconditional love and support. I could not get through the tough time and complete the thesis without them, especially during the coronavirus pandemic. This thesis is dedicated to my family. I am glad I made this decision to start this candidature. Definitely, I have grown to become a better version of myself in more ways than one.