Dynamic Optimization of Asset Allocation Strategies under Downside Risk Control: An Application to Futures Markets

54 Pages Posted: 29 Sep 2014 Last revised: 12 Nov 2021

Date Written: January 20, 2016

Abstract

We introduce a novel out-of-sample approach to solve a real-time investor's multiperiod portfolio choice problem in a setting with (time-varying) conditional predictability, multiple assets and downside risk control. The method involves defining a discrete set of one-period portfolio allocation policies and choosing among them at portfolio revision dates within a discrete-time stochastic dynamic programming approach so as to maximize an investor's expected utility. Our framing of the portfolio problem overcomes the curse of dimensionality that is associated with time-varying investment opportunity sets and multiple assets. We apply our technique to dynamic investment decision problems in futures markets and demonstrate its feasibility and usefulness.

Keywords: Dynamic portfolio choice, Predictability, Downside risk control, Estimation error, Real-time investor, Futures markets, Bayesian learning

JEL Classification: G11, C61

Suggested Citation

Schüssler, Rainer Alexander, Dynamic Optimization of Asset Allocation Strategies under Downside Risk Control: An Application to Futures Markets (January 20, 2016). Available at SSRN: https://ssrn.com/abstract=2502383 or http://dx.doi.org/10.2139/ssrn.2502383

Rainer Alexander Schüssler (Contact Author)

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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