Basak, Suleyman and Chabakauri, Georgy 
ORCID: 0009-0002-7980-269X
(2010)
Dynamic mean-variance asset allocation.
Review of Financial Studies, 23 (8).
pp. 2970-3016.
ISSN 0893-9454
Abstract
We solve the dynamic mean-variance portfolio problem and derive its time-consistent solution using dynamic programming. Previous literature, in contrast, only determines either myopic or precommitment (committing to follow the initially optimal policy) solutions. We provide a fully analytical simple characterization of the dynamically optimal mean-variance portfolios within a general incomplete-market economy. We also identify a probability measure that incorporates intertemporal hedging demands and facilitates tractability. We illustrate this by easily computing portfolios explicitly under various stochastic investment opportunities. A calibration exercise shows that the mean variance hedging demands are economically significant.
| Item Type: | Article |
|---|---|
| Official URL: | http://rfs.oxfordjournals.org/ |
| Additional Information: | © 2010 Oxford University Press |
| Divisions: | LSE |
| Subjects: | H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis |
| Date Deposited: | 27 Aug 2010 10:38 |
| Last Modified: | 11 Oct 2025 06:45 |
| URI: | http://eprints.lse.ac.uk/id/eprint/28981 |
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