A closed-form solution of the multi-period portfolio choice problem for a quadratic utility function
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Publication:492800
DOI10.1007/S10479-015-1802-ZzbMATH Open1358.91088arXiv1207.1003OpenAlexW1966488176MaRDI QIDQ492800FDOQ492800
Authors: Taras Bodnar, Nestor Parolya, Wolfgang Schmid 
Publication date: 21 August 2015
Published in: Annals of Operations Research (Search for Journal in Brave)
Abstract: In the present paper, we derive a closed-form solution of the multi-period portfolio choice problem for a quadratic utility function with and without a riskless asset. All results are derived under weak conditions on the asset returns. No assumption on the correlation structure between different time points is needed and no assumption on the distribution is imposed. All expressions are presented in terms of the conditional mean vectors and the conditional covariance matrices. If the multivariate process of the asset returns is independent it is shown that in the case without a riskless asset the solution is presented as a sequence of optimal portfolio weights obtained by solving the single-period Markowitz optimization problem. The process dynamics are included only in the shape parameter of the utility function. If a riskless asset is present then the multi-period optimal portfolio weights are proportional to the single-period solutions multiplied by time-varying constants which are depending on the process dynamics. Remarkably, in the case of a portfolio selection with the tangency portfolio the multi-period solution coincides with the sequence of the simple-period solutions. Finally, we compare the suggested strategies with existing multi-period portfolio allocation methods for real data.
Full work available at URL: https://arxiv.org/abs/1207.1003
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Cited In (14)
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- Dynamic currency futures and options hedging model
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- Portfolio optimization with irreversible long-term investments in renewable energy under policy risk: a mixed-integer multistage stochastic model and a moving-horizon approach
- Portfolio decision with a quadratic utility and inflation risk
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