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A Monte Carlo Method for Optimal Portfolios

Author

Listed:
  • Jérôme B. Detemple

    (Boston University, School of Management and CIRANO,)

  • René Garcia

    (Université de Montréal, Department of Economics and CIRANO,)

  • Marcel Rindisbacher

    (University of Toronto, Rotman School of Management and CIRANO)

Abstract

This paper proposes a new simulation-based approach for optimal portfolio allocation in realistic environments with complex dynamics for the state variables and large numbers of factors and assets. A first illustration involves a choice between equity and cash with nonlinear interest rate and market price of risk dynamics. Intertemporal hedging demands significantly increase the demand for stocks and exhibit low volatility. We then analyze settings where stock returns are also predicted by dividend yields and where investors have wealth-dependent relative risk aversion. Large-scale problems with many assets, including the Nasdaq, SP500, bonds, and cash, are also examined. Copyright 2003 by the American Finance Association.

Suggested Citation

  • Jérôme B. Detemple & René Garcia & Marcel Rindisbacher, 2003. "A Monte Carlo Method for Optimal Portfolios," Journal of Finance, American Finance Association, vol. 58(1), pages 401-446, February.
    • Handle: RePEc:bla:jfinan:v:58:y:2003:i:1:p:401-446
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    References listed on IDEAS

    as
    1. Lo, Andrew W., 1988. "Maximum Likelihood Estimation of Generalized Itô Processes with Discretely Sampled Data," Econometric Theory, Cambridge University Press, vol. 4(02), pages 231-247, August.
    2. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
    3. Nelson, Daniel B & Foster, Dean P, 1994. "Asymptotic Filtering Theory for Univariate ARCH Models," Econometrica, Econometric Society, vol. 62(1), pages 1-41, January.
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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