Premium
Optimal portfolio trading subject to stochastic dominance constraints under second‐order autoregressive price dynamics
Author(s) -
Singh Arti,
Dharmaraja Selvamuthu
Publication year - 2020
Publication title -
international transactions in operational research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.032
H-Index - 52
eISSN - 1475-3995
pISSN - 0969-6016
DOI - 10.1111/itor.12435
Subject(s) - stochastic dominance , autoregressive model , mathematical optimization , portfolio , computer science , portfolio optimization , stochastic programming , trading strategy , order (exchange) , quadratic programming , mathematical economics , economics , econometrics , mathematics , financial economics , finance
This paper studies the optimal portfolio trading problem under the generalized second‐order autoregressive execution price model. The problem of minimizing expected execution cost under the proposed price model is formulated as a quadratic programming (QP) problem. For a risk‐averse trader, problem formulation under the second‐order stochastic dominance constraints results in a quadratically constrained QP problem. Under some conditions on the execution price model, it is proved that the portfolio trading problems for risk‐neutral and risk‐averse traders become convex programming problems, which have many theoretical and computational advantages over the general class of optimization problems. Extensive numerical illustrations are provided, which render the practical significance of the proposed execution price model and the portfolio trading problems.