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Need to Meet Investment Goals? Track Synthetic Indexes with the SDDP Method
1Escuela de Negocios, Universidad Adolfo Ibañez, Diagonal Las Torres, 2640 Santiago, Chile.
Abstract:
This work presents a novel application of the Stochastic Dual Dynamic Problem (SDDP) to large-scale asset allocation. We construct a model that delivers allocation policies based on how the portfolio performs with respect to user-defined (synthetic) indexes, and implement it in a SDDP open-source package. Based on US economic cycles and ETF data, we generate Markovian regime-dependent returns to solve an instance of multiple assets and 28 time periods. Results show our solution outperforms its benchmark, in both profitability and tracking error.
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