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Asset Allocation with Regime-Switching: Discrete-Time Case

Published online by Cambridge University Press:  17 April 2015

Ka Chun Cheung  and
Hailiang Yang
Ka Chun Cheung
Affiliation:
Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong
Hailiang Yang
Affiliation:
Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong
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Abstract

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In this paper, we study the optimal asset allocation problem under a discrete regime switching model. Under the short-selling and leveraging constraints, the existence and uniqueness of the optimal trading strategy are obtained. We also obtain some natural properties of the optimal strategy. In particular, we show that if there exists a stochastic dominance order relationship between the random returns at different regimes, then we can order the optimal proportions we should invest in such regimes.

Keywords

Optimal trading strategyPower utility functionFinite-state Markovian ChainBellman equationStochastic order
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 34 , Issue 1 , May 2004 , pp. 99 - 111
Copyright
Copyright © ASTIN Bulletin 2004

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