Title: A model of optimal dynamic asset allocation in a Value-at-Risk framework

Authors: Ching-Ping Wang, David Shyu, Y. Chris Liao, Ming-Chi Chen, Miao-Ling Chen

Addresses: Department of Finance, National Sun Yat-sen University, No.70 Lien-hai Rd., Kaohsiung, Taiwan. ' Department of Finance, National Sun Yat-sen University, No.70 Lien-hai Rd., Kaohsiung, Taiwan. ' Department of Finance, National Sun Yat-sen University, No.70 Lien-hai Rd., Kaohsiung, Taiwan. ' Department of Finance, National Sun Yat-sen University, No.70 Lien-hai Rd., Kaohsiung, Taiwan. ' Department of Finance, National Sun Yat-sen University, No.70 Lien-hai Rd., Kaohsiung, Taiwan

Abstract: This study focuses on the problem of investors in optimising dynamic asset allocation to maximise expected utility under the value-at-risk (VaR) constraint. Although Basak and Shapiro presented this topic, they assumed a complete market and employed the martingale approach to determine a dynamic asset allocation strategy. However, a complete market does not exist in the real world and the martingale approach is not suitable for portfolio selection. Consequently, this study relaxes these limitations and firstly provides a solving method to derive the dynamic asset allocation under the VaR constraint. A simple case and a general case of derivation of optimal dynamic asset allocation are explored. A continuous probability distribution also can be approximated by the discrete probability distribution discussed in this study.

Keywords: dynamic asset allocation; value-at-risk; portfolio selection.

DOI: 10.1504/IJRAM.2003.003827

International Journal of Risk Assessment and Management, 2003 Vol.4 No.4, pp.301 - 309

Published online: 10 May 2004 *

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