Abstract:
This paper considers an asset allocation Strategy over a finite period under investment
uncertainty and short-sale constraints as a continuous-time stochastic control problem. Investment
uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short sale
constraints, the optimal asset allocation strategy can be obtained analytically. We consider several
kinds of short-sale constraints and employ the backward Markov chain approximation method to
explore the impact of short-sale constraints on asset allocation decisions. Our results show that the
short-sale constraints do indeed have a significant impact on these decisions.
