Explicit solution to dynamic portfolio choice problem : The continuous-time detour
Computational Finance
2015-04-14 v1 Portfolio Management
Pricing of Securities
Statistical Finance
Abstract
This paper solves the dynamic portfolio choice problem. Using an explicit solution with a power utility, we construct a bridge between a continuous and discrete VAR model to assess portfolio sensitivities. We find, from a well analyzed example that the optimal allocation to stocks is particularly sensitive to Sharpe ratio. Our quantitative analysis highlights that this sensitivity increases when the risk aversion decreases and/or when the time horizon increases. This finding explains the low accuracy of discrete numerical methods especially along the tails of the unconditional distribution of the state variable.
Keywords
Cite
@article{arxiv.1504.03079,
title = {Explicit solution to dynamic portfolio choice problem : The continuous-time detour},
author = {François Legendre and Djibril Togola},
journal= {arXiv preprint arXiv:1504.03079},
year = {2015}
}