The impact of short-sale constraints on asset allocation strategies via the backward Markov chain approximation method

Publisher:
Springer New York LLC
Publication Type:
Journal Article
Citation:
Computational Economics, 2006, 28 (2), pp. 113 - 137
Issue Date:
2006-01
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This paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous-time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be obtained analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on these decisions.
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