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Portfolio optimization in stochastic markets

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  • U. Çakmak
  • S. Özekici

Abstract

We consider a multiperiod mean-variance model where the model parameters change according to a stochastic market. The mean vector and covariance matrix of the random returns of risky assets all depend on the state of the market during any period where the market process is assumed to follow a Markov chain. Dynamic programming is used to solve an auxiliary problem which, in turn, gives the efficient frontier of the mean-variance formulation. An explicit expression is obtained for the efficient frontier and an illustrative example is given to demonstrate the application of the procedure. Copyright Springer-Verlag 2006

Suggested Citation

  • U. Çakmak & S. Özekici, 2006. "Portfolio optimization in stochastic markets," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 63(1), pages 151-168, February.
    • Handle: RePEc:spr:mathme:v:63:y:2006:i:1:p:151-168
    DOI: 10.1007/s00186-005-0020-x
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