Dynamic portfolio optimization with bounded shortfall risks.

A. Gabih, W. Grecksch and R. Wunderlich

Stochastic Analysis and Applications, 3(23): 579-594 2005

Abstract :

We address the dynamic portfolio optimization problem where the expected utility from terminal wealth has to be maximized. The special feature of this paper is an additional constraint on the portfolio strategy modeling bounded shortfall risks which are measured by Value at Risk or Expected Loss. Using a continuous-time model of a complete financial market and applying martingale methods, analytic expressions for the optimal terminal wealth and the optimal portfolio strategies are given. Finally, some numerical results are presented.