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Portfolio optimization in stochastic markets

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Abstract

We consider a multiperiod mean-variance model where the model parameters change according to a stochastic market. The mean vector and covariance matrix of the random returns of risky assets all depend on the state of the market during any period where the market process is assumed to follow a Markov chain. Dynamic programming is used to solve an auxiliary problem which, in turn, gives the efficient frontier of the mean-variance formulation. An explicit expression is obtained for the efficient frontier and an illustrative example is given to demonstrate the application of the procedure.

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Authors and Affiliations

  1. School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, GA, 30332-0205, USA

    U. Çakmak

  2. Department of Industrial Engineering, Koç University, 34450, Sarıyer-İstanbul, Turkey

    S. Özekici

Authors
  1. U. Çakmak
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  2. S. Özekici
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Correspondence to S. Özekici.

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Çakmak, U., Özekici, S. Portfolio optimization in stochastic markets. Math Meth Oper Res 63, 151–168 (2006). https://doi.org/10.1007/s00186-005-0020-x

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