TY - JOUR
AU - Haugh, Martin B
AU - Kogan, Leonid
AU - Wang, Jiang
TI - Evaluating Portfolio Policies: A Duality Approach
JF - National Bureau of Economic Research Working Paper Series
VL - No. 9861
PY - 2003
Y2 - July 2003
DO - 10.3386/w9861
UR - http://www.nber.org/papers/w9861
L1 - http://www.nber.org/papers/w9861.pdf
N1 - Author contact info:
Leonid Kogan
MIT Sloan School of Management
100 Main Street, E62-636
Cambridge, MA 02142
Tel: 617/504-9728
Fax: 617/258-6855
E-Mail: lkogan@mit.edu
Jiang Wang
MIT Sloan School of Management
100 Main Street, E62-614
Cambridge, MA 02142
Tel: 617/253-2632
Fax: 617/258-6855
E-Mail: wangj@mit.edu
AB - The performance of a given portfolio policy can in principle be evaluated by comparing its expected utility with that of the optimal policy. Unfortunately, the optimal policy is usually not computable in which case a direct comparison is impossible. In this paper we solve this problem by using the given portfolio policy to construct an upper bound on the unknown maximum expected utility. This construction is based on a dual formulation of the portfolio optimization problem. When the upper bound is close to the expected utility achieved by the given portfolio policy, the potential utility loss of this policy is guaranteed to be small. Our algorithm can be used to evaluate portfolio policies in models with incomplete markets and position constraints. We illustrate our methodology by analyzing the static and myopic policies in markets with return predictability and constraints on short sales and borrowing.
ER -