Zhou, Zhongbao, Liu, Xianghui, Xiao, Helu, Ren, TianTian, Liu, Wenbin (2018) Time-Consistent Strategies for Multi-Period Portfolio Optimization with/without the Risk-Free Asset. Mathematical Problems in Engineering, 2018 . ISSN 1024-123X. (doi:10.1155/2018/7563093) (KAR id:69515)
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Official URL: https://doi.org/10.1155/2018/7563093 |
Abstract
The pre-commitment and time-consistent strategies are the two most representative investment strategies for the classic multi-period mean-variance portfolio selection problem. In this paper, we revisit the case in which there exists one risk-free asset in the market and prove that the time-consistent solution is equivalent to the optimal open-loop solution for the classic multi-period mean-variance model. Then, we further derive the explicit time-consistent solution for the classic multi-period mean-variance model only with risky assets, by constructing a novel Lagrange function and using backward induction. Also, we prove that the Sharpe ratio with both risky and risk-free assets strictly dominates that of only with risky assets under the time-consistent strategy setting. After the theoretical investigation, we perform extensive numerical simulations and out-of-sample tests to compare the performance of pre-commitment and time-consistent strategies. The empirical studies shed light on the important question: what is the primary motivation of using the time-consistent investment strategy.
Item Type: | Article |
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DOI/Identification number: | 10.1155/2018/7563093 |
Subjects: | Q Science > QA Mathematics (inc Computing science) > QA 76 Software, computer programming, |
Divisions: | Divisions > Kent Business School - Division > Kent Business School (do not use) |
Depositing User: | Steve Liu |
Date Deposited: | 11 Oct 2018 08:53 UTC |
Last Modified: | 05 Nov 2024 12:31 UTC |
Resource URI: | https://kar.kent.ac.uk/id/eprint/69515 (The current URI for this page, for reference purposes) |
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