Near-Optimal Dynamic Asset Allocation in Financial Markets with Trading Constraints

46 Pages Posted: 30 Jun 2019 Last revised: 29 Oct 2019

See all articles by Thijs Kamma

Thijs Kamma

Maastricht University; Netspar

Antoon Pelsser

Maastricht University; Netspar

Date Written: June 28, 2019

Abstract

We develop a dual-control method for approximating investment strategies in incomplete environments that emerge from the presence of trading constraints. Convex duality enables the approximate technology to generate lower and upper bounds on the optimal value function. The mechanism rests on closed-form expressions pertaining to the portfolio composition, from which we are able to derive the near-optimal asset allocation explicitly. In a real financial market, we illustrate the accuracy of our approximate method on a dual CRRA utility function that characterises the preferences of a finite-horizon investor. Negligible duality gaps and insignificant annual welfare losses substantiate accuracy of the technique.

Keywords: Convex duality, incomplete markets, life-cycle investment, Malliavin calculus, state-dependent utility, stochastic optimal control

JEL Classification: D52, D53, G11

Suggested Citation

Kamma, Thijs and Pelsser, Antoon A. J., Near-Optimal Dynamic Asset Allocation in Financial Markets with Trading Constraints (June 28, 2019). Available at SSRN: https://ssrn.com/abstract=3403176 or http://dx.doi.org/10.2139/ssrn.3403176

Thijs Kamma (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Antoon A. J. Pelsser

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://https://sites.google.com/site/apelsseraca/

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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