A Dynamic Programming Approach to Constrained Portfolios
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A Dynamic Programming Approach to Constrained Portfolios. / Kraft, Holger; Steffensen, Mogens.
In: European Journal of Operational Research, Vol. 229, No. 2, 2013, p. 453-461.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - A Dynamic Programming Approach to Constrained Portfolios
AU - Kraft, Holger
AU - Steffensen, Mogens
PY - 2013
Y1 - 2013
N2 - This paper studies constrained portfolio problems that may involve constraints on the probability or the expected size of a shortfall of wealth or consumption. Our first contribution is that we solve the problems by dynamic programming, which is in contrast to the existing literature that applies the martingale method. More precisely, we construct the non-separable value function by formalizing the optimal constrained terminal wealth to be a (conjectured) contingent claim on the optimal non-constrained terminal wealth. This is relevant by itself, but also opens up the opportunity to derive new solutions to constrained problems. As a second contribution, we thus derive new results for non-strict constraints on the shortfall of intermediate wealth and/or consumption.
AB - This paper studies constrained portfolio problems that may involve constraints on the probability or the expected size of a shortfall of wealth or consumption. Our first contribution is that we solve the problems by dynamic programming, which is in contrast to the existing literature that applies the martingale method. More precisely, we construct the non-separable value function by formalizing the optimal constrained terminal wealth to be a (conjectured) contingent claim on the optimal non-constrained terminal wealth. This is relevant by itself, but also opens up the opportunity to derive new solutions to constrained problems. As a second contribution, we thus derive new results for non-strict constraints on the shortfall of intermediate wealth and/or consumption.
U2 - 10.1016/j.ejor.2013.02.039
DO - 10.1016/j.ejor.2013.02.039
M3 - Journal article
VL - 229
SP - 453
EP - 461
JO - European Journal of Operational Research
JF - European Journal of Operational Research
SN - 0377-2217
IS - 2
ER -
ID: 102777941