On the exact solution of the multi-period portfolio choice problem for an exponential utility under return predictability

DOI10.1016/J.EJOR.2015.04.039zbMATH Open1346.91261arXiv1207.1037OpenAlexW2169686235MaRDI QIDQ319811FDOQ319811

Authors: Taras Bodnar, Nestor Parolya, Wolfgang Schmid 

Publication date: 6 October 2016

Published in: European Journal of Operational Research (Search for Journal in Brave)

Abstract: In this paper we derive the exact solution of the multi-period portfolio choice problem for an exponential utility function under return predictability. It is assumed that the asset returns depend on predictable variables and that the joint random process of the asset returns and the predictable variables follow a vector autoregressive process. We prove that the optimal portfolio weights depend on the covariance matrices of the next two periods and the conditional mean vector of the next period. The case without predictable variables and the case of independent asset returns are partial cases of our solution. Furthermore, we provide an empirical study where the cumulative empirical distribution function of the investor's wealth is calculated using the exact solution. It is compared with the investment strategy obtained under the additional assumption that the asset returns are independently distributed.

Full work available at URL: https://arxiv.org/abs/1207.1037

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zbMATH Keywords

expected utility optimizationexponential utility functionmulti-period asset allocationreturn predictability

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Portfolio theory (91G10)

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Cited In (16)

• On the existence of optimal strategies in the control problem for a stochastic discrete time system with respect to the probability criterion
• Bayesian estimation of the global minimum variance portfolio
• Determination and estimation of risk aversion coefficients
• On the construction of positional control in a multistep portfolio optimization problem with probabilistic criterion
• The Exact Solution of Multi-period Portfolio Choice Problem with Exponential Utility
• Mean-variance efficiency of optimal power and logarithmic utility portfolios
• Bayesian inference of the multi-period optimal portfolio for an exponential utility
• A consumption and investment problem via a Markov decision processes approach with random horizon
• Pre-commitment vs. time-consistent strategies for the generalized multi-period portfolio optimization with stochastic cash flows
• Multi-period power utility optimization under stock return predictability
• Estimation of the global minimum variance portfolio in high dimensions
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• A closed-form solution of the multi-period portfolio choice problem for a quadratic utility function
• Reduction of the two-step problem of stochastic optimal control with bilinear model to the problem of mixed integer linear programming
• Dynamic portfolio choice with return predictability and transaction costs
• The optimal multi-period hedging model of currency futures and options with exponential utility

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