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Working paper

Worst-Case Approach to Strategic Optimal Portfolio Selection Under Transaction Costs and Trading Limits

Andreev N. A.
We study a worst-case scenario approach to the problem of strategic portfolio selection in presence of transaction costs and trading limits under uncertain stochastic process of market parameters. Unlike classic stochastic programming, the approach is model-free, solution of the arising Bellman-Isaacs equation can be easily found numerically under some general assumptions. All results hold for a general class of utility functions and several risky assets. For a special case of proportional transaction costs and CRRA utility, we present a numerical scheme which allows to reduce the dimension of the Bellman-Isaacs equation by a number of risky assets.