Dynamic mean-variance portfolio optimization with Value-at-Risk constraint in continuous-time

Abstract

This paper studies the dynamic mean-risk portfolio optimization problem with variance and Value-at-Risk(VaR) as the risk measures in recognizing the importance of incorporating different risk measures in the portfolio management model. Using the martingale approach and combining it with the quantile optimization technique, we provide the solution framework for this problem and show that the optimal terminal wealth may have different patterns under a general market setting. When the market parameters are deterministic, we develop the closed-form solution for this problem. Examples are provided to illustrate the solution procedure of our method and demonstrate the beneft of our dynamic portfolio model comparing with its static counterpart.

Keywords: Dynamic mean-variance portfolio selection, Value-at-risk, Martingale approach, Dynamic portfolio optimization