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On pre-commitment aspects of a time-consistent strategy for a mean-variance investor

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  • Cong, F.
  • Oosterlee, C.W.

Abstract

In this paper, a link between a time-consistent and a pre-commitment investment strategy is established. We define an implied investment target, which is implicitly contained in a time-consistent strategy at a given time step and wealth level. By imposing the implied investment target at the initial time step on a time-consistent strategy, we form a hybrid strategy which may generate better mean-variance efficient frontiers than the time-consistent strategy. We extend the numerical algorithm proposed in Cong and Oosterlee (2016b) to solve constrained time-consistent mean-variance optimization problems. Since the time-consistent and the pre-commitment strategies generate different terminal wealth distributions, time-consistency is not always inferior to pre-commitment.

Suggested Citation

  • Cong, F. & Oosterlee, C.W., 2016. "On pre-commitment aspects of a time-consistent strategy for a mean-variance investor," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 178-193.
    • Handle: RePEc:eee:dyncon:v:70:y:2016:i:c:p:178-193
    DOI: 10.1016/j.jedc.2016.07.010
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    Cited by:

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    More about this item

    Keywords

    Finance; Investment analysis; Decision analysis; Simulation; Time-consistency;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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