Basak, Suleyman and Chabakauri, Georgy
Dynamic mean-variance asset allocation.
Review of financial studies, 23
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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.
||© 2010 Oxford University Press
||portfolio selection, stochastic volatility, consumption decisions, constant elasticity, complete markets, term structure, choice, risk, returns, inconsistency, ISI
|Library of Congress subject classification:
||H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
|Journal of Economic Literature Classification System:
||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
||Collections > Economists Online
||27 Aug 2010 10:38
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