Near-Optimal Asset Allocation in Financial Markets with Trading Constraints

Kamma, T., & Pelsser, A. (2022). Near-optimal asset allocation in financial markets with trading constraints. European Journal of Operational Research, 297(2), 766-781.

41 Pages Posted: 30 Jun 2019 Last revised: 31 Jan 2022

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 multidimensional financial markets with convex trading constraints. The method relies on a projection of the optimal solution to an (unconstrained) auxiliary problem to obtain a feasible and near-optimal solution to the original problem. We obtain lower and upper bounds on the optimal value function using convex duality methods. The gap between the bounds indicates the precision of the near-optimal solution. We illustrate the effectiveness of our method in a market with different trading constraints such as borrowing, short-sale constraints and non-traded assets. We also show that our method works well for state-dependent utility functions.

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 Asset Allocation in Financial Markets with Trading Constraints (June 28, 2019). Kamma, T., & Pelsser, A. (2022). Near-optimal asset allocation in financial markets with trading constraints. European Journal of Operational Research, 297(2), 766-781., 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, Limburg 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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