Optimal investment to minimize the probability of drawdown

We determine the optimal investment strategy in a Black-Scholes financial market to minimize the so-called probability of drawdown, namely, the probability that the value of an investment portfolio reaches some fixed proportion of its maximum value to date. We assume that the portfolio is subject to...

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Bibliographic Details
Published inStochastics (Abingdon, Eng. : 2005) Vol. 88; no. 6; pp. 946 - 958
Main Authors Angoshtari, Bahman, Bayraktar, Erhan, Young, Virginia R.
Format Journal Article
LanguageEnglish
Published Abingdon Taylor & Francis 17.08.2016
Taylor & Francis Ltd
Subjects
Constants
Economic models
Financing
Investment
Investment policy
Investment strategy
Markets
Optimal investment
Optimization
Probability
probability of drawdown
Probability theory
Randomness
stochastic optimal control
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Summary:We determine the optimal investment strategy in a Black-Scholes financial market to minimize the so-called probability of drawdown, namely, the probability that the value of an investment portfolio reaches some fixed proportion of its maximum value to date. We assume that the portfolio is subject to a payout that is a deterministic function of its value, as might be the case for an endowment fund paying at a specified rate, for example, at a constant rate or at a rate that is proportional to the fund's value.
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ISSN:1744-2508
1744-2516
DOI:10.1080/17442508.2016.1155590