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Mathematical Problems in Engineering
Volume 2014, Article ID 787943, 11 pages
http://dx.doi.org/10.1155/2014/787943
Research Article

Optimal Portfolio Strategy under Rolling Economic Maximum Drawdown Constraints

1School of Economics and Commerce, South China University of Technology, Guangzhou 510006, China
2School of Electronic and Information Engineering, South China University of Technology, Guangzhou 510641, China
3School of Business Administration, South China University of Technology, Guangzhou 510641, China

Received 27 February 2014; Revised 18 June 2014; Accepted 19 June 2014; Published 10 July 2014

Academic Editor: Pankaj Gupta

Copyright © 2014 Xiaojian Yu et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper deals with the problem of optimal portfolio strategy under the constraints of rolling economic maximum drawdown. A more practical strategy is developed by using rolling Sharpe ratio in computing the allocation proportion in contrast to existing models. Besides, another novel strategy named “REDP strategy” is further proposed, which replaces the rolling economic drawdown of the portfolio with the rolling economic drawdown of the risky asset. The simulation tests prove that REDP strategy can ensure the portfolio to satisfy the drawdown constraint and outperforms other strategies significantly. An empirical comparison research on the performances of different strategies is carried out by using the 23-year monthly data of SPTR, DJUBS, and 3-month T-bill. The investment cases of single risky asset and two risky assets are both studied in this paper. Empirical results indicate that the REDP strategy successfully controls the maximum drawdown within the given limit and performs best in both return and risk.