Dynamic equity asset allocation with liquidity-adjusted market risk criterion: Appraisal of efficient and coherent portfolios

This article extends research literature related to the evaluation of modern portfolio risk management techniques by providing a broad modeling of dynamic equity asset allocation under the supposition of illiquid and adverse market settings. This study analyzes, from a fund manager's perspective, the performance of liquidity adjusted risk modeling in obtaining efficient and coherent equity trading portfolios subject to realistic operational constraints as specified by the fund manager. Specifically, the article proposes a re-engineered and robust approach to equity optimal portfolio selection, in a Liquidity-Adjusted Value at Risk (L-VaR) framework, and particularly from the perspective of trading portfolios that have both long and short trading positions or for trading portfolios that consists merely of long positions. Moreover, in this article, the authors develop a dynamic portfolio selection model and an optimization algorithm that allocates equity assets by minimizing L-VaR subject to the constraints that the expected return, trading volume and liquidation horizon should meet the budget limits set by the fund manager.