Mean-Variance Policy for Discrete-time Cone Constrained Markets: The Consistency in Efficiency and Minimum-Variance Signed Supermartingale Measure

DOI10.1111/MAFI.12093arXiv1403.0718OpenAlexW2139460490WikidataQ57445401 ScholiaQ57445401MaRDI QIDQ6249504FDOQ6249504

Authors: Xiangyu Cui, Duan Li, Xun Li 

Publication date: 4 March 2014

Abstract: The discrete-time mean-variance portfolio selection formulation, a representative of general dynamic mean-risk portfolio selection problems, does not satisfy time consistency in efficiency (TCIE) in general, i.e., a truncated pre-committed efficient policy may become inefficient when considering the corresponding truncated problem, thus stimulating investors' irrational investment behavior. We investigate analytically effects of portfolio constraints on time consistency of efficiency for convex cone constrained markets. More specifically, we derive the semi-analytical expressions for the pre-committed efficient mean-variance policy and the minimum-variance signed supermartingale measure (VSSM) and reveal their close relationship. Our analysis shows that the pre-committed discrete-time efficient mean-variance policy satisfies TCIE if and only if the conditional expectation of VSSM's density (with respect to the original probability measure) is nonnegative, or once the conditional expectation becomes negative, it remains at the same negative value until the terminal time. Our findings indicate that the property of time consistency in efficiency only depends on the basic market setting, including portfolio constraints, and this fact motivates us to establish a general solution framework in constructing TCIE dynamic portfolio selection problem formulations by introducing suitable portfolio constraints.

Full work available at URL: https://doi.org/10.1111/mafi.12093

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Mathematics Subject Classification ID

Actuarial science and mathematical finance (91Gxx)

Cited In (2)

• Time-consistent multiperiod mean semivariance portfolio selection with the real constraints
• Dynamic discrete-time portfolio selection for defined contribution pension funds with inflation risk

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