Dynamic Investment Portfolio Optimization under Constraints in the Financial Market with Regime Switching using Model Predictive Control

Abstract

In this work, we consider the optimal portfolio selection problem under hard constraints on trading volume amounts when the dynamics of the risky asset returns are governed by a discrete-time approximation of the Markov-modulated geometric Brownian motion. The states of Markov chain are interpreted as the states of an economy. The problem is stated as a dynamic tracking problem of a reference portfolio with desired return. We propose to use the model predictive control (MPC) methodology in order to obtain feedback trading strategies. Our approach is tested on a set of a real data from the radically different financial markets: the Russian Stock Exchange MICEX, the New York Stock Exchange and the Foreign Exchange Market (FOREX).