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Continuous time mean variance asset allocation: A time-consistent strategy

  • Wang, J.
  • Forsyth, P.A.
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    We develop a numerical scheme for determining the optimal asset allocation strategy for time-consistent, continuous time, mean variance optimization. Any type of constraint can be applied to the investment policy. The optimal policies for time-consistent and pre-commitment strategies are compared. When realistic constraints are applied, the efficient frontiers for the pre-commitment and time-consistent strategies are similar, but the optimal investment strategies are quite different.

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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 209 (2011)
    Issue (Month): 2 (March)
    Pages: 184-201

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    Handle: RePEc:eee:ejores:v:209:y:2011:i:2:p:184-201
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    1. Fu, Chenpeng & Lari-Lavassani, Ali & Li, Xun, 2010. "Dynamic mean-variance portfolio selection with borrowing constraint," European Journal of Operational Research, Elsevier, vol. 200(1), pages 312-319, January.
    2. Andrew J. G. Cairns & David Blake & Kevin Dowd, 2004. "Stochastic lifestyling: optimal dynamic asset allocation for defined contribution pension plans," LSE Research Online Documents on Economics 24831, London School of Economics and Political Science, LSE Library.
    3. Duan Li & Wan-Lung Ng, 2000. "Optimal Dynamic Portfolio Selection: Multiperiod Mean-Variance Formulation," Mathematical Finance, Wiley Blackwell, vol. 10(3), pages 387-406.
    4. Suleyman Basak & Georgy Chabakauri, 2010. "Dynamic Mean-Variance Asset Allocation," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2970-3016, August.
    5. Wang, J. & Forsyth, P.A., 2010. "Numerical solution of the Hamilton-Jacobi-Bellman formulation for continuous time mean variance asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 207-230, February.
    6. Chiu, Mei Choi & Li, Duan, 2006. "Asset and liability management under a continuous-time mean-variance optimization framework," Insurance: Mathematics and Economics, Elsevier, vol. 39(3), pages 330-355, December.
    7. Gerrard, Russell & Haberman, Steven & Vigna, Elena, 2004. "Optimal investment choices post-retirement in a defined contribution pension scheme," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 321-342, October.
    8. Markus LEIPPOLD & Fabio TROJANI & Paolo VANINI, 2002. "A Geometric Approach to Multiperiod Mean Variance Optimization of Assets and Liabilities," FAME Research Paper Series rp48, International Center for Financial Asset Management and Engineering.
    9. Nguyen, Pascal & Portait, Roland, 2002. "Dynamic asset allocation with mean variance preferences and a solvency constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 11-32, January.
    10. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    11. Wang, Zengwu & Xia, Jianming & Zhang, Lihong, 2007. "Optimal investment for an insurer: The martingale approach," Insurance: Mathematics and Economics, Elsevier, vol. 40(2), pages 322-334, March.
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