Optimal portfolio strategies under a shortfall constraint
Abstract
We impose dynamically, a shortfall constraint in terms of Tail Conditional Expectation on the portfolio selection problem in continuous time, in order to obtain optimal strategies. The financial market is assumed to comprise n risky assets driven by geometric Brownian motion and one risk-free asset. The method of Lagrange multipliers is combined with the Hamilton-Jacobi-Bellman equation to insert the constraint into the resolution framework. The constraint is re-calculated at short intervals of time throughout the investment horizon. A numerical method is applied to obtain an approximate solution to the problem. It is found that the imposition of the constraint curbs investment in the risky assets.
Published
2009-06-01
Issue
Section
Research Articles
The following license applies:
Attribution CC BY
This license lets others distribute, remix, tweak, and build upon your work, even commercially, as long as they credit you for the original creation.