TY - JOUR

T1 - Optimal Portfolio Selection with Regime-Switching Hamilton-Jacobi-Bellman (HJB) Equation and Maximum Value-at-Risk (MVaR) Constraint

AU - Setyani, F.

AU - Novita, M.

AU - Malik, M.

N1 - Funding Information:
This work is supported by Hibah PITTA 2018 funded by DRPM Universitas Indonesia No.2283/UN2.R3.1/HKP.05.00/2018
Publisher Copyright:
© Published under licence by IOP Publishing Ltd.

PY - 2018/12/4

Y1 - 2018/12/4

N2 - The forming of portfolio is necessary to determine the decision of the best investment so as to investors can identify the securities and determine the allocation of asset to obtain an optimal portfolio. The problem in forming optimal portfolio is the determination of the proportion which is allocated at investment assets in order to maximize expected return with certain risks. The model contains regime-switching market models, which states are interpreted as the states of economy. The risk measuring instrument used is VaR and MVaR is defined as the maximum value of the VaRs in all economy states. The optimal proportion formula is sought by using the stochastic optimal control theory with the aim of maximizing the discounted utility of consumption over a finite time horizon. We use regime-switching Hamilton-Jacobi-Bellman (HJB) equation and then derive a system of coupled HJB equation corresponding to the economy states. Lagrange multiplier method is used to solve the optimization problem with the constraint. We apply Kuhn-Tucker conditions due to MVaR is an inequality function, so that we derive the optimal investment and the optimal consumption. Finally, numerical examples are investigated, and the effect of parameter on the optimal investment and on the optimal consumption are studied.

AB - The forming of portfolio is necessary to determine the decision of the best investment so as to investors can identify the securities and determine the allocation of asset to obtain an optimal portfolio. The problem in forming optimal portfolio is the determination of the proportion which is allocated at investment assets in order to maximize expected return with certain risks. The model contains regime-switching market models, which states are interpreted as the states of economy. The risk measuring instrument used is VaR and MVaR is defined as the maximum value of the VaRs in all economy states. The optimal proportion formula is sought by using the stochastic optimal control theory with the aim of maximizing the discounted utility of consumption over a finite time horizon. We use regime-switching Hamilton-Jacobi-Bellman (HJB) equation and then derive a system of coupled HJB equation corresponding to the economy states. Lagrange multiplier method is used to solve the optimization problem with the constraint. We apply Kuhn-Tucker conditions due to MVaR is an inequality function, so that we derive the optimal investment and the optimal consumption. Finally, numerical examples are investigated, and the effect of parameter on the optimal investment and on the optimal consumption are studied.

UR - http://www.scopus.com/inward/record.url?scp=85058274218&partnerID=8YFLogxK

U2 - 10.1088/1742-6596/1108/1/012070

DO - 10.1088/1742-6596/1108/1/012070

M3 - Conference article

AN - SCOPUS:85058274218

SN - 1742-6588

VL - 1108

JO - Journal of Physics: Conference Series

JF - Journal of Physics: Conference Series

IS - 1

M1 - 012070

T2 - 2nd Mathematics, Informatics, Science and Education International Conference, MISEIC 2018

Y2 - 21 July 2018

ER -