Evaluating Portfolio Policies: A Duality Approach
Name
4329-03.pdf
Size
218.71 KB
Format
Adobe PDF
Checksum (MD5)
fb35fee9cdd81ee686a74a08a2d25534
Author(s)
Kogan, Leonid
Haugh, Martin
Wang, Jiang
Date Issued
August 15, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4329-03
Abstract
The performance of a given portfolio policy can in principle be evaluated by comparing
its expected utility with that of the optimal policy. Unfortunately, the optimal policy is
usually not computable in which case a direct comparison is impossible. In this paper
we solve this problem by using the given portfolio policy to construct an upper bound
on the unknown maximum expected utility. This construction is based on a dual
formulation of the portfolio optimization problem. When the upper bound is close to
the expected utility achieved by the given portfolio policy, the potential utility loss of
this policy is guaranteed to be small. Our algorithm can be used to evaluate portfolio
policies in models with incomplete markets and position constraints. We illustrate our
methodology by analyzing the static and myopic policies in markets with return
predictability and constraints on short sales and borrowin
Subjects
Portfolio Choice
Duality
Dynamic Programming
Constraints
Monte Carlo
Simulation
Persistent DSpace Link
