Risk sensitive asset allocation
type: Item
instance of: scholarly article
title: Risk sensitive asset allocation
zbMATH Open document ID: 0951.90051
DOI: 10.1016/S0165-1889(99)00017-2
publication date: 2000-08-21T00:00:00Z
review text: This paper develops a continuous time modeling approach for making optimal asset allocation decisions. Macroeconomic and financial factors are explicitly modeled as Gaussian stochastic processes which directly affect the mean returns of the assets. We employ methods of risk sensitive control theory, thereby using an infinite horizon objective that is natural and features the long run expected growth rate and the asymptotic variance as two measures of performance, analogous to the mean return and variance, respectively, in the single period Markowitz model. The optimal strategy is a simple function of the factor levels, and, even with constraints on the portfolio proportions, it can be computed by solving a quadratic program. Explicit formulas can be obtained, as is illustrated by an example where the only factor is a Vasicek-type interest rate and where there are two assets: cash and a stock index. The methods are further illustrated by studies of two data sets: U.S. data with two assets and up to three factors, and Australian data with three assets and three factors.
Mathematics Subject Classification ID: 90C40
Mathematics Subject Classification ID: 91B28
Mathematics Subject Classification ID: 90C15
Mathematics Subject Classification ID: 90C20
Mathematics Subject Classification ID: 62M05
zbMATH DE Number: 1493217
zbMATH Keywords: allocation decisions
zbMATH Keywords: macroeconomic
zbMATH Keywords: Gaussian stochastic processes
zbMATH Keywords: Markowitz model
author: Tomasz R. Bielecki
author: Stanley R. Pliska
author: Michael Sherris
MaRDI profile type: Publication
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full work available at URL: s0165-1889(99)00017-2
OpenAlex ID: W2012131330
published in: Journal of Economic Dynamics and Control
description: scientific article; zbMATH DE number 1493217