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Open AccessJournal ArticleDOI

Portfolio Optimization under Correlation Constraint

Aditya Maheshwari, +1 more
- Vol. 8, Iss: 1, pp 15
TLDR
In this paper, the authors consider the problem of portfolio optimization with a correlation constraint and find analytical expressions for the constrained subgame perfect (CSGP) and the constrained precommitment (CPC) portfolio strategies.
Abstract
We consider the problem of portfolio optimization with a correlation constraint. The framework is the multi-period stochastic financial market setting with one tradable stock, stochastic income, and a non-tradable index. The correlation constraint is imposed on the portfolio and the non-tradable index at some benchmark time horizon. The goal is to maximize a portofolio’s expected exponential utility subject to the correlation constraint. Two types of optimal portfolio strategies are considered: the subgame perfect and the precommitment ones. We find analytical expressions for the constrained subgame perfect (CSGP) and the constrained precommitment (CPC) portfolio strategies. Both these portfolio strategies yield significantly lower risk when compared to the unconstrained setting, at the cost of a small utility loss. The performance of the CSGP and CPC portfolio strategies is similar.

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Citations
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Journal ArticleDOI

Optimal Portfolios Under a Correlation Constraint

TL;DR: Pourbabaee, Kwak, and Pirvu as mentioned in this paper extended their result to any increasing law invariant objective function without condition on the sign of the correlation. And they illustrate the theoretical results by establishing the portfolio that has maximum Sharpe ratio under a correlation constraint.
Journal ArticleDOI

Pricing and Hedging Index Options under Mean-Variance Criteria in Incomplete Markets

TL;DR: In this paper , a portfolio selection problem where tradable assets are a bank account, and standard put and call options are written on the S&P 500 index in incomplete markets in which there exist bid-ask spreads and finite liquidity is considered.
References
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Book

Theory of Games and Economic Behavior

TL;DR: Theory of games and economic behavior as mentioned in this paper is the classic work upon which modern-day game theory is based, and it has been widely used to analyze a host of real-world phenomena from arms races to optimal policy choices of presidential candidates, from vaccination policy to major league baseball salary negotiations.
Journal ArticleDOI

Option pricing: A simplified approach☆

TL;DR: In this paper, a simple discrete-time model for valuing options is presented, which is based on the Black-Scholes model, which has previously been derived only by much more difficult methods.
Journal ArticleDOI

Mean–variance optimal portfolios in the presence of a benchmark with applications to fraud detection

TL;DR: In this article, mean-variance efficient portfolios are derived when investors aim to achieve a given correlation (or a given dependence structure) with a stochastic benchmark (linked to the market) as a reference portfolio.
Journal ArticleDOI

Time-Consistent Strategies for a Multiperiod Mean-Variance Portfolio Selection Problem

TL;DR: Many interesting properties of the time-consistent Nash equilibrium strategies for a multiperiod mean-variance portfolio selection problem are identified through numerical sensitivity analysis and by comparing them with the classical pre-commitment solutions.
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A Multi Period Equilibrium Pricing Model

TL;DR: In this article, an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income streams is proposed, where both time consistent and time inconsistent trading strategies are considered, and the equilibriums prices of a contingent claim written on the risky asset and non-traded underlying are obtained.
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