Author(s)

Yang Wang, Yonghong Wu, Xinguang Zhang

Department of Mathematics, Curtin University, Perth, Australia.

Based on the mean-variance portfolio selection under multi-period criterion, this paper focuses on the study of the uncertain time horizon and the regime-switching market including the bankruptcy state, where the conditional distribution of exit time is followed by the market state. When the market enters the bankruptcy state, investors are assumed to get back δ part of the wealth from the bankrupt company, where δ refers to the retrieval rate. By introducing the Lagrange multiplier λ, we create an innovative expression for the wealth process and the iterative representation of the value function to obtain the analytical expression of the optimal strategy and the corresponding efficient frontier. Besides, some special cases and numerical examples are presented to demonstrate the effects of state-dependent exit probability and bankruptcy state on the investment strategy.

Portfolio Selection, Bankruptcy State, State-Dependent Exit Probability, Dynamic Programming, Regime-Switching

Wang, Y. , Wu, Y. and Zhang, X. (2019) Multi-Period Mean-Variance Portfolio Selection with State-Dependent Exit Probability and Bankruptcy State. Journal of Mathematical Finance, 9, 152-174. doi: 10.4236/jmf.2019.92008.