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Optimal Portfolio Allocation with Price Limit Constraint

Author

Listed:
  • Keshavarz Haddad, Gholamreza

    (Graduate School of Management and Economics, Sharif University of Technology)

  • Heidari, Hadi

    (Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran)

Abstract

Daily price limits are adopted by many securities exchanges in countries such as the USA, Canada, Japan and various other countries in Europe and Asia, in order to increase the stability of the financial market. These limits confine the price of the financial asset during all trading stages of any trading day to a range, usually determined based on the previous day’s closing price. In this paper we study the portfolio optimization problem with impose the price limit constraint. The dynamic programming technique is applied to derive the Hamilton–Jacobi–Bellman equation and the method of Lagrange multiplier is used to tackle the constraint. Optimization problem solution results, using numerical method show that the equilibrium path of wealth and investment in risky assets has a different way than in the absence of price limits.

Suggested Citation

  • Keshavarz Haddad, Gholamreza & Heidari, Hadi, 2020. "Optimal Portfolio Allocation with Price Limit Constraint," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(2), pages 123-134, April.
    • Handle: RePEc:mbr:jmonec:v:15:y:2020:i:2:p:123-134
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Optimal Portfolio; Limited Prices; Dynamic Programming;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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