IDEAS home Printed from https://ideas.repec.org/a/taf/eurjfi/v16y2010i2p137-152.html
   My bibliography  Save this article

Discrete-time implementation of continuous-time portfolio strategies

Author

Listed:
  • Nicole Branger
  • Beate Breuer
  • Christian Schlag

Abstract

Optimal portfolio strategies are easy to compute in continuous-time models. In reality trading is discrete, so that these optimal strategies cannot be implemented properly. When the investor follows a naive discretization strategy, i.e. when he implements the optimal continuous-time strategy in discrete time, he will suffer a utility loss. For a variety of models, we analyze this discretization error in a simulation study. We find that time discreteness can be neglected when only the stock and the money market account are traded, even in models with stochastic volatility and jumps. On the other hand, when derivatives are traded the utility loss due to discrete trading can be much larger than the utility gain from having access to derivatives. To benefit from derivatives, the investor has to rebalance his portfolio at least daily.

Suggested Citation

  • Nicole Branger & Beate Breuer & Christian Schlag, 2010. "Discrete-time implementation of continuous-time portfolio strategies," The European Journal of Finance, Taylor & Francis Journals, vol. 16(2), pages 137-152.
  • Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:137-152
    DOI: 10.1080/13518470903075854
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903075854
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Leland, Hayne E., 1999. "Optimal Portfolio Management with Transactions Costs and Capital Gains Taxes," Research Program in Finance, Working Paper Series qt0fw6k0hm, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Branger, Nicole & Hansis, Alexandra, 2012. "Asset allocation: How much does model choice matter?," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1865-1882.

    More about this item

    Keywords

    asset allocation; discrete trading; use of derivatives;

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:137-152. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/REJF20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.