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 Open1346.91261OpenAlexW2169686235MaRDI 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)

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

zbMATH Keywords

expected utility optimizationexponential utility functionmulti-period asset allocationreturn predictability

Mathematics Subject Classification ID

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

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.

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Cited in

(16)

• The optimal multi-period hedging model of currency futures and options with exponential utility
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• On the construction of positional control in a multistep portfolio optimization problem with probabilistic criterion
• 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
• Multi-period power utility optimization under stock return predictability
• Mean-variance efficiency of optimal power and logarithmic utility portfolios
• Estimation of the global minimum variance portfolio in high dimensions
• 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
• Pre-commitment vs. time-consistent strategies for the generalized multi-period portfolio optimization with stochastic cash flows
• Reduction of the two-step problem of stochastic optimal control with bilinear model to the problem of mixed integer linear programming
• Optimal investment selection game problems for institutional investors under log returns

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