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Smooth Value Function with Applications in Wealth-CVaR Efficient Portfolio and Turnpike Property

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  • Baojun Bian
  • Harry Zheng
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    Abstract

    In this paper we continue the study of Bian-Miao-Zheng (2011) and extend the results there to a more general class of utility functions which may be bounded and non-strictly-concave and show that there is a classical solution to the HJB equation with the dual control method. We then apply the results to study the efficient frontier of wealth and conditional VaR (CVaR) problem and the turnpike property problem. For the former we construct explicitly the optimal control and discuss the choice of the optimal threadshold level and illustrate that the wealth and the CVaR are positively correlated. For the latter we give a simple proof to the turnpike property of the optimal policy of long-run investors and generalize the results of Huang-Zariphopoulou (1999).

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    File URL: http://arxiv.org/pdf/1212.3137
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    Paper provided by arXiv.org in its series Papers with number 1212.3137.

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    Date of creation: Dec 2012
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    Handle: RePEc:arx:papers:1212.3137

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    1. Cox, John C. & Huang, Chi-fu, 1992. "A continuous-time portfolio turnpike theorem," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 491-507.
    2. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
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