TY - JOUR

T1 - Equilibrium strategy for a multi-period weighted mean-variance portfolio selection in a Markov regime-switching market with uncertain time-horizon and a stochastic cash flow

AU - Ge, Hao

AU - Li, Xingyi

AU - Li, Xun

AU - Li, Zhongfei

N1 - Publisher Copyright:
© 2021 Taylor & Francis Group, LLC.

PY - 2021/8/25

Y1 - 2021/8/25

N2 - This article considers a multi-period weighted mean-variance portfolio selection problem with uncertain time-horizon and a stochastic cash flow in a Markov regime-switching market. The random returns of risky assets and amount of the cash flow all depend on the states of a stochastic market which are assumed to follow a discrete-time Markov chain. Based on the conditional distribution of uncertain time-horizon caused by exogenous factors, we construct a more general mean-variance investment model. Within a game theoretic framework, we derive the equilibrium strategy and equilibrium value function in closed-form by applying backward induction approach. In addition, we show the equilibrium efficient frontier and discuss some degenerate cases. Finally, some numerical examples and sensitivity analysis are presented to illustrate equilibrium efficient frontiers and the effects of uncertain time-horizon on the equilibrium strategy and equilibrium efficient frontier as well as regime-switching and stochastic cash flow on the equilibrium efficient frontier.

AB - This article considers a multi-period weighted mean-variance portfolio selection problem with uncertain time-horizon and a stochastic cash flow in a Markov regime-switching market. The random returns of risky assets and amount of the cash flow all depend on the states of a stochastic market which are assumed to follow a discrete-time Markov chain. Based on the conditional distribution of uncertain time-horizon caused by exogenous factors, we construct a more general mean-variance investment model. Within a game theoretic framework, we derive the equilibrium strategy and equilibrium value function in closed-form by applying backward induction approach. In addition, we show the equilibrium efficient frontier and discuss some degenerate cases. Finally, some numerical examples and sensitivity analysis are presented to illustrate equilibrium efficient frontiers and the effects of uncertain time-horizon on the equilibrium strategy and equilibrium efficient frontier as well as regime-switching and stochastic cash flow on the equilibrium efficient frontier.

KW - equilibrium efficient frontier

KW - equilibrium strategy

KW - Markov regime-switching

KW - multi-period weighted mean-variance portfolio selection

KW - stochastic cash flow

KW - Uncertain time-horizon

UR - http://www.scopus.com/inward/record.url?scp=85113564031&partnerID=8YFLogxK

U2 - 10.1080/03610926.2021.1939379

DO - 10.1080/03610926.2021.1939379

M3 - Journal article

AN - SCOPUS:85113564031

SP - 1

EP - 36

JO - Communications in Statistics - Theory and Methods

JF - Communications in Statistics - Theory and Methods

SN - 0361-0926

ER -