Risk sensitive asset allocation

DOI10.1016/S0165-1889(99)00017-2MaRDI QIDQ1575279zbMATH OpenOpenAlexFDO

Authors Tomasz R. Bielecki, Stanley R. Pliska, Michael Sherris

Publication date 21 August 2000

Published in Journal of Economic Dynamics and Control (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/s0165-1889(99)00017-2

allocation decisions Gaussian stochastic processes macroeconomic Markowitz model

Markov processes: estimation; hidden Markov models (62M05) Stochastic programming (90C15) Quadratic programming (90C20) Markov and semi-Markov decision processes (90C40)

Review text

This paper develops a continuous time modeling approach for making optimal asset allocation decisions. Macroeconomic and financial factors are explicitly modeled as Gaussian stochastic processes which directly affect the mean returns of the assets. We employ methods of risk sensitive control theory, thereby using an infinite horizon objective that is natural and features the long run expected growth rate and the asymptotic variance as two measures of performance, analogous to the mean return and variance, respectively, in the single period Markowitz model. The optimal strategy is a simple function of the factor levels, and, even with constraints on the portfolio proportions, it can be computed by solving a quadratic program. Explicit formulas can be obtained, as is illustrated by an example where the only factor is a Vasicek-type interest rate and where there are two assets: cash and a stock index. The methods are further illustrated by studies of two data sets: U.S. data with two assets and up to three factors, and Australian data with three assets and three factors.

Recommendations

Cites work

Cited in

(35)

This page was built for publication: Risk sensitive asset allocation

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q1575279)