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On Robust Multi-Period Pre-Commitment And Time-Consistent Mean-Variance Portfolio Optimization

Author

Listed:
  • F. CONG

    (Delft Institute of Applied Mathematics, Delft University of Technology, Mekelweg 4, Delft, 2628 CD, The Netherlands)

  • C. W. OOSTERLEE

    (Delft Institute of Applied Mathematics, Delft University of Technology, Mekelweg 4, Delft, 2628 CD, The Netherlands†Centrum Wiskunde & Informatica, Science Park 123, Amsterdam, 1098 XG, The Netherlands)

Abstract

We consider robust pre-commitment and time-consistent mean-variance optimal asset allocation strategies, that are required to perform well also in a worst-case scenario regarding the development of the asset price. We show that worst-case scenarios for both strategies can be found by solving a specific equation each time step. In the unconstrained asset allocation case, the robust pre-commitment as well as the time-consistent strategy are identical to the corresponding robust myopic strategies, by which investors perform robust portfolio control only for one time step and conduct a risk-free strategy afterwards. In the experiments, the robustness of pre-commitment and time-consistent strategies is studied in detail. Our analysis and numerical results indicate that the time-consistent allocation strategy is more stable when possible incorrect assumptions regarding the future asset development are modeled and taken into account. In some situations, the time-consistent strategy can even generate higher efficient frontiers than the pre-commitment strategy (which is counter-intuitive), because the time-consistency restriction appears to protect an investor in such a situation.

Suggested Citation

  • F. Cong & C. W. Oosterlee, 2017. "On Robust Multi-Period Pre-Commitment And Time-Consistent Mean-Variance Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(07), pages 1-26, November.
    • Handle: RePEc:wsi:ijtafx:v:20:y:2017:i:07:n:s0219024917500492
    DOI: 10.1142/S0219024917500492
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    References listed on IDEAS

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