Better than pre-committed optimal mean-variance policy in a jump diffusion market

Better than pre-committed optimal mean-variance policy in a jump diffusion market Dynamic mean-variance investment model can not be solved by dynamic programming directly due to the nonseparable structure of variance minimization problem. Instead of adopting embedding scheme, Lagrangian duality approach or mean-variance hedging approach, we transfer the model into mean field mean-variance formulation and derive the explicit pre-committed optimal mean-variance policy in a jump diffusion market. Similar to multi-period setting, the pre-committed optimal mean-variance policy is not time consistent in efficiency. When the wealth level of the investor exceeds some pre-given level, following pre-committed optimal mean-variance policy leads to irrational investment behaviors. Thus, we propose a semi-self-financing revised policy, in which the investor is allowed to withdraw partial of his wealth out of the market. And show the revised policy has a better investment performance in the sense of achieving the same mean-variance pair as pre-committed policy and receiving a nonnegative free cash flow stream. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Mathematical Methods of Operations Research Springer Journals

Better than pre-committed optimal mean-variance policy in a jump diffusion market

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2017 by Springer-Verlag Berlin Heidelberg
Subject
Mathematics; Calculus of Variations and Optimal Control; Optimization; Operations Research/Decision Theory; Business and Management, general
ISSN
1432-2994
eISSN
1432-5217
D.O.I.
10.1007/s00186-017-0572-6
Publisher site
See Article on Publisher Site

Abstract

Dynamic mean-variance investment model can not be solved by dynamic programming directly due to the nonseparable structure of variance minimization problem. Instead of adopting embedding scheme, Lagrangian duality approach or mean-variance hedging approach, we transfer the model into mean field mean-variance formulation and derive the explicit pre-committed optimal mean-variance policy in a jump diffusion market. Similar to multi-period setting, the pre-committed optimal mean-variance policy is not time consistent in efficiency. When the wealth level of the investor exceeds some pre-given level, following pre-committed optimal mean-variance policy leads to irrational investment behaviors. Thus, we propose a semi-self-financing revised policy, in which the investor is allowed to withdraw partial of his wealth out of the market. And show the revised policy has a better investment performance in the sense of achieving the same mean-variance pair as pre-committed policy and receiving a nonnegative free cash flow stream.

Journal

Mathematical Methods of Operations ResearchSpringer Journals

Published: Feb 21, 2017

References

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