Dynamic mean–variance portfolio selection with borrowing constraint

• DOI: 10.1016/j.ejor.2009.01.005
• Publication Date: 2009-01-11T09:57:17Z
• Authors: Chenpeng Fu; Ali Lari-Lavassani; Xun Li
• Keywords: 0202 electrical engineering, electronic engineering, information engineering; 02 engineering and technology

Abstract This paper derives explicit closed form solutions, for the efficient frontier and optimal investment strategy, for the dynamic mean–variance portfolio selection problem under the constraint of a higher borrowing rate. The method used is the Hamilton–Jacobi–Bellman (HJB) equation in a stochastic piecewise linear-quadratic (PLQ) control framework. The results are illustrated on an example.