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Markowitz's Mean-Variance Asset–Liability Management with Regime Switching: A Multi-Period Model

Markowitz's Mean-Variance Asset–Liability Management with Regime Switching: A Multi-Period... Abstract This paper considers an optimal portfolio selection problem under Markowitz's mean-variance portfolio selection problem in a multi-period regime-switching model. We assume that there are n + 1 securities in the market. Given an economic state which is modelled by a finite state Markov chain, the return of each security at a fixed time point is a random variable. The return random variables may be different if the economic state is changed even for the same security at the same time point. We start our analysis from the no-liability case, in the spirit of Li and Ng (2000), both the optimal investment strategy and the efficient frontier are derived. Then we add uncontrollable liability into the model. By direct comparison with the no-liability case, the optimal strategy can be derived explicitly. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

Markowitz's Mean-Variance Asset–Liability Management with Regime Switching: A Multi-Period Model

Applied Mathematical Finance , Volume 18 (1): 22 – Feb 17, 2011
22 pages

Markowitz's Mean-Variance Asset–Liability Management with Regime Switching: A Multi-Period Model

Abstract

Abstract This paper considers an optimal portfolio selection problem under Markowitz's mean-variance portfolio selection problem in a multi-period regime-switching model. We assume that there are n + 1 securities in the market. Given an economic state which is modelled by a finite state Markov chain, the return of each security at a fixed time point is a random variable. The return random variables may be different if the economic state is changed even for the same...
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Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/13504861003703633
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper considers an optimal portfolio selection problem under Markowitz's mean-variance portfolio selection problem in a multi-period regime-switching model. We assume that there are n + 1 securities in the market. Given an economic state which is modelled by a finite state Markov chain, the return of each security at a fixed time point is a random variable. The return random variables may be different if the economic state is changed even for the same security at the same time point. We start our analysis from the no-liability case, in the spirit of Li and Ng (2000), both the optimal investment strategy and the efficient frontier are derived. Then we add uncontrollable liability into the model. By direct comparison with the no-liability case, the optimal strategy can be derived explicitly.

Journal

Applied Mathematical FinanceTaylor & Francis

Published: Feb 17, 2011

Keywords: discrete time; multi-period; regime switching; markov chain; asset-liability management; portfolio selection; efficient frontier

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