TITLE:
Multi-Period Mean-Variance Portfolio Selection with State-Dependent Exit Probability and Bankruptcy State
AUTHORS:
Yang Wang, Yonghong Wu, Xinguang Zhang
KEYWORDS:
Portfolio Selection, Bankruptcy State, State-Dependent Exit Probability, Dynamic Programming, Regime-Switching
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.9 No.2,
May
10,
2019
ABSTRACT: Based on the mean-variance portfolio selection under multi-period criterion,
this paper focuses on the study of the uncertain time horizon and the regime-switching market including the bankruptcy state, where the conditional
distribution of exit time is followed by the market state. When the market
enters the bankruptcy state, investors are assumed to get back δ part of the
wealth from the bankrupt company, where δ refers to the retrieval rate. By
introducing the Lagrange multiplier λ, we create an innovative expression
for the wealth process and the iterative representation of the value function to
obtain the analytical expression of the optimal strategy and the corresponding
efficient frontier. Besides, some special cases and numerical examples are
presented to demonstrate the effects of state-dependent exit probability and
bankruptcy state on the investment strategy.