Portfolio optimization and model predictive control: A kinetic approach

DOI10.3934/DCDSB.2019136MaRDI QIDQ2326623zbMATH OpenOpenAlexFDO

Authors Torsten Trimborn, Lorenzo Pareschi, Martin Frank

Publication date 10 October 2019

Published in Discrete and Continuous Dynamical Systems. Series B (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1711.03291

zbMATH Keywords

model predictive controlportfolio optimizationbounded rationalitystock marketkinetic modelingstylized facts

Mathematics Subject Classification ID

Portfolio theory (91G10) Model predictive control (93B45)

Abstract: In this paper, we introduce a large system of interacting financial agents in which each agent is faced with the decision of how to allocate his capital between a risky stock or a risk-less bond. The investment decision of investors, derived through an optimization, drives the stock price. The model has been inspired by the econophysical Levy-Levy-Solomon model (Economics Letters, 45). The goal of this work is to gain insights into the stock price and wealth distribution. We especially want to discover the causes for the appearance of power-laws in financial data. We follow a kinetic approach similar to (D. Maldarella, L. Pareschi, Physica A, 391) and derive the mean field limit of our microscopic agent dynamics. The novelty in our approach is that the financial agents apply model predictive control (MPC) to approximate and solve the optimization of their utility function. Interestingly, the MPC approach gives a mathematical connection between the two opponent economic concepts of modeling financial agents to be rational or boundedly rational. Furthermore, this is to our knowledge the first kinetic portfolio model which considers a wealth and stock price distribution simultaneously. Due to our kinetic approach, we can study the wealth and price distribution on a mesoscopic level. The wealth distribution is characterized by a lognormal law. For the stock price distribution, we can either observe a lognormal behavior in the case of long-term investors or a power-law in the case of high-frequency trader. Furthermore, the stock return data exhibits a fat-tail, which is a well known characteristic of real financial data.

Recommendations

• A macroscopic portfolio model: from rational agents to bounded rationality
• Mesoscopic modelling of financial markets
• Microscopic and kinetic models in financial markets
• STOCHASTIC MODEL PREDICTIVE CONTROL AND PORTFOLIO OPTIMIZATION
• Kinetic models for optimal control of wealth inequalities

Cited in

(10)

• Mesoscopic modelling of financial markets
• Recent Developments in Controlled Crowd Dynamics
• A kinetic description of individual wealth growth and control
• Mean-field limit of a hybrid system for multi-lane car-truck traffic
• The application of model predictive control on stock portfolio optimization with prediction based on geometric Brownian motion-Kalman filter
• Mean-field limit of a hybrid system for multi-lane multi-class traffic
• Optimal control about multi-agent wealth exchange and decision-making competence
• Robust mathematical formulation and probabilistic description of agent-based computational economic market models
• Kinetic model for asset allocation with strategy switching
• A macroscopic portfolio model: from rational agents to bounded rationality

This page was built for publication: Portfolio optimization and model predictive control: A kinetic approach

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2326623)