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Dynamic optimal portfolio choice in a jump-diffusion model with investment constraints

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  • Jin, Xing
  • Zhang, Kun

Abstract

We consider the dynamic portfolio choice problem in a jump-diffusion model, where an investor may face constraints on her portfolio weights: for instance, no-short-selling constraints. It is a daunting task to use standard numerical methods to solve a constrained portfolio choice problem, especially when there is a large number of state variables. By suitably embedding the constrained problem in an appropriate family of unconstrained ones, we provide some equivalent optimality conditions for the indirect value function and optimal portfolio weights. These results simplify and help to solve the constrained optimal portfolio choice problem in jump-diffusion models. Finally, we apply our theoretical results to several examples, to examine the impact of no-short-selling and/or no-borrowing constraints on the performance of optimal portfolio strategies.

Suggested Citation

  • Jin, Xing & Zhang, Kun, 2013. "Dynamic optimal portfolio choice in a jump-diffusion model with investment constraints," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1733-1746.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:5:p:1733-1746
    DOI: 10.1016/j.jbankfin.2013.01.017
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    References listed on IDEAS

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    Cited by:

    1. Díaz, Antonio & Esparcia, Carlos, 2021. "Dynamic optimal portfolio choice under time-varying risk aversion," International Economics, Elsevier, vol. 166(C), pages 1-22.
    2. Branger, Nicole & Muck, Matthias & Seifried, Frank Thomas & Weisheit, Stefan, 2017. "Optimal portfolios when variances and covariances can jump," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 59-89.
    3. Haluk Yener & Fuat Can Beylunioglu, 2017. "Outperforming A Stochastic Benchmark Under Borrowing And Rectangular Constraints," Working Papers 1701, The Center for Financial Studies (CEFIS), Istanbul Bilgi University.
    4. Lu, Jin-Ray & Hwang, Chih-Chiang & Lin, Chien-Yi, 2016. "Do shareholders appreciate capital investment policies of corporations?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 344-353.
    5. Lu, Jin-Ray & Hwang, Chih-Chiang & Liu, Min-Luan & Lin, Chien-Yi, 2016. "An incentive problem of risk balancing in portfolio choices," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 192-200.
    6. Liu, Qiang & Xiang, Yun & Zhao, Yonghong, 2019. "An outperforming investment strategy under fractional Brownian motion," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 505-515.
    7. Thai Nguyen, 2016. "Optimal investment and consumption with downside risk constraint in jump-diffusion models," Papers 1604.05584, arXiv.org.
    8. Davi Valladão & Thuener Silva & Marcus Poggi, 2019. "Time-consistent risk-constrained dynamic portfolio optimization with transactional costs and time-dependent returns," Annals of Operations Research, Springer, vol. 282(1), pages 379-405, November.

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    More about this item

    Keywords

    Optimal portfolio choice; Portfolio constraints; Jump-diffusion process; Martingale-duality approach;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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