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Evaluating Portfolio Policies: A Duality Approach

  • Martin B. Haugh
  • Leonid Kogan
  • Jiang Wang
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    The performance of a given portfolio policy can in principle be evaluated by comparing its expected utility with that of the optimal policy. Unfortunately, the optimal policy is usually not computable in which case a direct comparison is impossible. In this paper we solve this problem by using the given portfolio policy to construct an upper bound on the unknown maximum expected utility. This construction is based on a dual formulation of the portfolio optimization problem. When the upper bound is close to the expected utility achieved by the given portfolio policy, the potential utility loss of this policy is guaranteed to be small. Our algorithm can be used to evaluate portfolio policies in models with incomplete markets and position constraints. We illustrate our methodology by analyzing the static and myopic policies in markets with return predictability and constraints on short sales and borrowing.

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    File URL: http://www.nber.org/papers/w9861.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9861.

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    Date of creation: Jul 2003
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    Publication status: published as Haugh, M., Kogan, L., and J. Wang. “Evaluating Portfolio Policies: A Duality Approach." Operations Research 54 (2004): 405-418.
    Handle: RePEc:nbr:nberwo:9861
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