Title: Dynamic trading strategies in portfolio choice problems
Authors: Wang, Fei (王飛)
Abstract: This thesis studies dynamic trading strategies in portfolio choice problems. Investors
seek to allocate their wealth among different investment opportunities. The
optimal strategies are determined by various aspects related to risk attitudes of investors
and dynamic conditions of financial markets. The risk-averse utility functions
are used to characterize the investors risk preference. We consider three portfolio
choice problems.
The first model studies a portfolio choice problem with budget constraints. Borrowing
and short-selling constraints are not allowed. We characterize the optimal
dynamic policy for a two-period problem using an exponential utility function. Additionally,
we compare myopic and static policies with dynamic policies for different
conditions. Furthermore, we also study the optimality of dynamic and myopic policies
for multi-period problems with HARA utility functions. Finally, we provide
numerical examples in order to compare the different strategies’ performances.
In the second model, we determine the optimal investment strategy for scenarios
with both fixed and proportional transaction costs in a multi-period setting. The
optimal decision for the single period problem can be characterized by three regions
in which the investor should buy, sell, or hold his position. The optimal policy for
the multi-period problem is, unfortunately, more complicated, but with numerical
examples, we are able to show that a heuristic based on a single period policy
performs quite well.
In the third model, we study the mean-reversion effect in the stock market.
The market efficiency theory implies that prices respond quickly and accurately to
relevant information in the stock market. However, there is a great deal of debate
over the efficient market hypothesis with a large amount of empirical evidence both
supporting and contradicting the argument. Mean reversion in stock prices would
indicate that this theory is largely incorrect, and as such, we examine the China
A-share market for this phenomenon. An analysis of 700 stocks over a 6-year period
shows that there is a significant mean reversion effect under the appropriate horizon.
Notes: CityU Call Number: HG4529.5 .W36 2015; v, 93 pages : illustrations 30 cm; Thesis (Ph.D.)--City University of Hong Kong, 2015.; Includes bibliographical references (pages 88-93)
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