Dynamic mean-LPM and mean-CVaR portfolio optimization in continuous-time
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Publication:5346501
DOI10.1137/140955264zbMATH Open1414.91338arXiv1402.3464OpenAlexW2137631553WikidataQ57445398 ScholiaQ57445398MaRDI QIDQ5346501FDOQ5346501
Authors: Ke Zhou, Duan Li, Cao, Xiren, J. J. Gao 
Publication date: 24 May 2017
Published in: SIAM Journal on Control and Optimization (Search for Journal in Brave)
Abstract: Instead of controlling "symmetric" risks measured by central moments of investment return or terminal wealth, more and more portfolio models have shifted their focus to manage "asymmetric" downside risks that the investment return is below certain threshold. Among the existing downside risk measures, the lower-partial moments (LPM) and conditional value-at-risk (CVaR) are probably most promising. In this paper we investigate the dynamic mean-LPM and mean-CVaR portfolio optimization problems in continuous-time, while the current literature has only witnessed their static versions. Our contributions are two-fold, in both building up tractable formulations and deriving corresponding analytical solutions. By imposing a limit funding level on the terminal wealth, we conquer the ill-posedness exhibited in the class of mean-downside risk portfolio models. The limit funding level not only enables us to solve both dynamic mean-LPM and mean-CVaR portfolio optimization problems, but also offers a flexibility to tame the aggressiveness of the portfolio policies generated from such mean - downside risk models. More specifically, for a general market setting, we prove the existence and uniqueness of the Lagrangian multiplies, which is a key step in applying the martingale approach, and establish a theoretical foundation for developing efficient numerical solution approaches. Moreover, for situations where the opportunity set of the market setting is deterministic, we derive analytical portfolio policies for both dynamic mean-LPM and mean-CVaR formulations.
Full work available at URL: https://arxiv.org/abs/1402.3464
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- scientific article; zbMATH DE number 2009828
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LPMstochastic controlCVaRmartingale approachconditional value-at-risk portfoliodynamic mean-downside risk portfolio optimizationlower-partial moments
Statistical methods; risk measures (91G70) Portfolio theory (91G10) Optimal stochastic control (93E20)
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Cited In (22)
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