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Optimum Constrained Portfolio Rules in a Diffusion Market

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  • Fernando Durrell
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    Abstract

    A portfolio selection model is derived for diffusions where inequality constraints are imposed on portfolio security weights. Using the method of stochastic dynamic programming Hamilton-Jacobi-Bellman (HJB) equations are obtained for the problem of maximizing the expected utility of terminal wealth over a finite time horizon. Optimal portfolio weights are given in feedback form in terms of the solution of the HJB equations and its partial derivatives. An analysis of the no-constraining (NC) region of a portfolio is also conducted.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860600840061
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 13 (2006)
    Issue (Month): 4 ()
    Pages: 285-307

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    Handle: RePEc:taf:apmtfi:v:13:y:2006:i:4:p:285-307

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    Related research

    Keywords: Utility; stochastic dynamic programming; Hamilton-Jacobi-Bellman equation; constraints;

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    1. Vila, Jean-Luc & Zariphopoulou, Thaleia, 1997. "Optimal Consumption and Portfolio Choice with Borrowing Constraints," Journal of Economic Theory, Elsevier, vol. 77(2), pages 402-431, December.
    2. Framstad, Nils Chr. & Oksendal, Bernt & Sulem, Agnes, 2001. "Optimal consumption and portfolio in a jump diffusion market with proportional transaction costs," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 233-257, April.
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