Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model
Abstract
A drawdown constraint forces the current wealth to remain above a given function of its maximum to date. We consider the portfolio optimisation problem of maximising the long-term growth rate of the expected utility of wealth subject to a drawdown constraint, as in the original setup of Grossman and Zhou (1993). We work in an abstract semimartingale financial market model with a general class of utility functions and drawdown constraints. We solve the problem by showing that it is in fact equivalent to an unconstrained problem with a suitably modified utility function. Both the value function and the optimal investment policy for the drawdown problem are given explicitly in terms of their counterparts in the unconstrained problem.
Keywords
Cite
@article{arxiv.1110.6289,
title = {Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model},
author = {Vladimir Cherny and Jan Obloj},
journal= {arXiv preprint arXiv:1110.6289},
year = {2013}
}
Comments
Updated version to appear in Finance and Stochastics, 31 pages