Document Type
Article
Publication Date
2013
Digital Object Identifier (DOI)
https://doi.org/10.1155/2013/726297
Abstract
We study the continuous-time mean-variance portfolio selection problem in the situation when investors must pay margin for short selling. The problem is essentially a nonlinear stochastic optimal control problem because the coefficients of positive and negative parts of control variables are different. We can not apply the results of stochastic linearquadratic (LQ) problem. Also the solution of corresponding Hamilton-Jacobi-Bellman (HJB) equation is not smooth. Li et al. (2002) studied the case when short selling is prohibited; therefore they only need to consider the positive part of control variables, whereas we need to handle both the positive part and the negative part of control variables. The main difficulty is that the positive part and the negative part are not independent. The previous results are not directly applicable. By decomposing the problem into several subproblems we figure out the solutions of HJB equation in two disjoint regions and then prove it is the viscosity solution of HJB equation. Finally we formulate solution of optimal portfolio and the efficient frontier. We also present two examples showing how different margin rates affect the optimal solutions and the efficient frontier.
Rights Information
This work is licensed under a Creative Commons Attribution 3.0 License.
Was this content written or created while at USF?
Yes
Citation / Publisher Attribution
Journal of Mathematics, v. 2013, art. 726297
Scholar Commons Citation
Zhou, Yuan and Wu, Zhe, "Mean-Variance Portfolio Selection with Margin Requirements" (2013). Mathematics and Statistics Faculty Publications. 78.
https://digitalcommons.usf.edu/mth_facpub/78
