Dynamic mean-variance portfolio optimization with Value-at-Risk constraint in continuous-time

2020 ◽  
Author(s):  
Dian Yu ◽  
weiping wu ◽  
Ke Zhou ◽  
Jianjun Gao ◽  
Junguo Lu
Keyword(s):  
At Risk ◽  
Portfolio Optimization ◽  
Continuous Time ◽  
Value At Risk ◽  
Risk Constraint ◽  
Mean Variance Portfolio ◽  
Mean Variance

DYNAMIC MEAN-VARIANCE PORTFOLIOS WITH RISK BUDGET

2020 ◽  
Vol 23 (01) ◽  
pp. 2050007
Author(s):  
SHENG-FENG LUO
Keyword(s):  
Value At Risk ◽  
Risk Measures ◽  
Optimal Solution ◽  
Economic Loss ◽  
Market Risk ◽  
Influential Factors ◽  
Good Investment ◽  
Risk Constraint ◽  
Mean Variance Portfolio ◽  
Mean Variance

We study a dynamic mean-variance portfolio selection problem subject to possible limit of market risk. Three measures of market risk are considered: value-at-risk, expected shortfall, and median shortfall. They are all calculated in a dynamic consistent sense. After applying the technique of delta-normal approximation, we can explicitly solve for the optimal solution and calculate the economic loss brought by the risk budget constraint. With the analytical results obtained, influential factors of economic loss are then explored by which some guidelines on trading practice are proposed. The guidelines are independent of risk measures, and are valuable to both institutions and regulators, for they suggest that an institutional investor would spontaneously obey good investment discipline to avoid potential impact of risk constraint. This result meets the purpose of external regulation from the perspective of market discipline.

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