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Dynamic Portfolio Choice

In: Extreme Financial Risks and Asset Allocation

Author

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  • Olivier Le Courtois
  • Christian Walter

Abstract

The principles of portfolio construction in a dynamic setting rest on the modeling of stock fluctuations and on the solution of an optimization program bearing on future consumption and wealth. At the beginning of the research in the field, the modeling of stock fluctuations was Brownian and optimization was performed solving a Hamilton–Jacobi–Bellman equation. This is the classic portfolio choice theory in continuous time, as developed by Merton (1969, 1971). For a detailed presentation, see the books of Merton (1992) and Quittard-Pinon (2003). See also Cox and Huang (1989) for the martingale approach. Other possibilities then appeared: for instance introducing jumps into the dynamics of stocks, or adding uncertainty to probabilities in the case of classic Brownian motions…

Suggested Citation

  • Olivier Le Courtois & Christian Walter, 2014. "Dynamic Portfolio Choice," World Scientific Book Chapters, in: Extreme Financial Risks and Asset Allocation, chapter 12, pages 303-329, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9781783263097_0012
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