Better than Pre-Commitment Mean-Variance Portfolio Allocation Strategies: A Semi-Self-Financing Hamilton-Jacobi-Bellman Equation Approach

42 Pages Posted: 18 Dec 2013 Last revised: 4 Jul 2015

See all articles by Duy-Minh Dang

Duy-Minh Dang

University of Queensland - School of Mathematics and Physics

Peter Forsyth

University of Waterloo - Cheriton School of Computer Science

Date Written: June 28, 2015

Abstract

We generalize the idea of semi-self-financing strategies, originally discussed in Ehrbar, Journal of Economic Theory (1990), and later formalized in em Cui et al, Mathematical Finance 22 (2012), for the pre-commitment mean-variance (MV) optimal portfolio allocation problem. The proposed semi-self-financing strategies are built upon a numerical solution framework for Hamilton-Jacobi-Bellman equations, and can be readily employed in a very general setting, namely continuous or discrete re-balancing, jump-diffusions with finite activity, and realistic portfolio constraints. We show that if the portfolio wealth exceeds a threshold, an MV optimal strategy is to withdraw cash. These semi-self-financing strategies are generally non-unique. Numerical results confirming the superiority of the efficient frontiers produced by the strategies with positive cash withdrawals are presented.Tests based on estimation of parameters from historical time series show that the semi-self-financing strategy is robust to estimation ambiguities.

Keywords: mean-variance, HJB equation, finite difference, viscosity solution, self-financing, continuous re-balancing, discrete re-balancing portfolio allocation

JEL Classification: E40, E43, G12, G13, C61, C63

Suggested Citation

Dang, Duy-Minh and Forsyth, Peter, Better than Pre-Commitment Mean-Variance Portfolio Allocation Strategies: A Semi-Self-Financing Hamilton-Jacobi-Bellman Equation Approach (June 28, 2015). Available at SSRN: https://ssrn.com/abstract=2368558 or http://dx.doi.org/10.2139/ssrn.2368558

Duy-Minh Dang (Contact Author)

University of Queensland - School of Mathematics and Physics ( email )

Priestly Building
St Lucia
Brisbane, Queesland 4067
Australia

HOME PAGE: http://people.smp.uq.edu.au/Duy-MinhDang/

Peter Forsyth

University of Waterloo - Cheriton School of Computer Science ( email )

Waterloo, Ontario N2L 3G1
Canada

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