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arXiv · 1410.1136

Dynamic Investment Portfolio Optimization under Constraints in the Financial Market with Regime Switching using Model Predictive Control

Vladimir Dombrovskii·Tatyana Obyedko
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Abstract

In this work, we consider the optimal portfolio selection problem under hard constraints on trading volume amounts when the dynamics of the risky asset returns are governed by a discrete-time approximation of the Markov-modulated geometric Brownian motion. The states of Markov chain are interpreted as the states of an economy. The problem is stated as a dynamic tracking problem of a reference portfolio with desired return. We propose to use the model predictive control (MPC) methodology in order to obtain feedback trading strategies. Our approach is tested on a set of a real data from the radically different financial markets: the Russian Stock Exchange MICEX, the New York Stock Exchange and the Foreign Exchange Market (FOREX).

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Vladimir Dombrovskii, Tatyana Obyedko. 2014-10-05. Dynamic Investment Portfolio Optimization under Constraints in the Financial Market with Regime Switching using Model Predictive Control. https://arxiv.org/abs/1410.1136

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