Skip to main content
Article thumbnail
Location of Repository

Dynamic mean-variance asset allocation

By Suleyman Basak and Georgy Chabakauri

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

Topics: HG Finance, HB Economic Theory
Publisher: Oxford University Press
Year: 2010
DOI identifier: 10.1093/rfs
OAI identifier: oai:eprints.lse.ac.uk:28981
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://rfs.oxfordjournals.org/ (external link)
  • http://eprints.lse.ac.uk/28981... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.