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Explicit solutions to dynamic portfolio choice problems: A continuous-time detour

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  • Legendre, François
  • Togola, Djibril

Abstract

Recently, many academic researchers have implemented several numerical procedures to solve a dynamic portfolio choice problem especially in incomplete markets. The subsequent numerical results are sometimes significantly different from one paper to another. Thus, they have all advocated the accuracy of their methods. This paper contributes to the previous accuracy debate by showing how to obtain some accurate numerical results without numerical approximations. We use the dynamic programming approach in continuous-time, and illustrate the framework with one risky and one riskless asset. The framework is flexible enough to cover all the HARA class of utility functions. We derive explicit solutions with a stochastic market price of risk and with a stochastic volatility. 7 countries are considered in numerical illustrations.

Suggested Citation

  • Legendre, François & Togola, Djibril, 2016. "Explicit solutions to dynamic portfolio choice problems: A continuous-time detour," Economic Modelling, Elsevier, vol. 58(C), pages 627-641.
    • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:627-641
    DOI: 10.1016/j.econmod.2016.03.029
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    Cited by:

    1. Cheng, Yuyang & Escobar-Anel, Marcos, 2023. "A class of portfolio optimization solvable problems," Finance Research Letters, Elsevier, vol. 52(C).
    2. Zhu, Yichen & Escobar-Anel, Marcos, 2022. "Polynomial affine approach to HARA utility maximization with applications to OrnsteinUhlenbeck 4/2 models," Applied Mathematics and Computation, Elsevier, vol. 418(C).
    3. Yufeng Lin & Xiaogang Wang & Yuehua Wu, 2023. "An Adaptive Multiple-Asset Portfolio Strategy with User-Specified Risk Tolerance," Mathematics, MDPI, vol. 11(7), pages 1-35, March.
    4. Cristina Sacala, 2016. "Portfolio Dynamics. A Macroeconomic Model," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(3), pages 170-176, July.

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    More about this item

    Keywords

    Dynamic portfolio choice; Long-term investing; Time aggregation; Incomplete markets; Explicit solutions; Numerical solutions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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