The Impact of Short-Sale Constraints on Asset Allocation Strategies via the Backward Markov Chain Approximation Method
AbstractThis paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be solved analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on the asset allocation decisions.
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Bibliographic InfoArticle provided by Society for Computational Economics in its journal Computational Economics.
Volume (Year): 28 (2006)
Issue (Month): 2 (September)
asset allocation; stochastic optimal control; short sale constraints; inflation risk; Markov chain approximation;
Other versions of this item:
- Carl Chiarella & Chih-Ying Hsiao, 2005. "The Impact of Short-Sale Constraints on Asset Allocation Strategies via the Backward Markov Chain Approximation Method," Research Paper Series 171, Quantitative Finance Research Centre, University of Technology, Sydney.
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