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Discrete-time implementation of continuous-time portfolio strategies


  • Nicole Branger
  • Beate Breuer
  • Christian Schlag


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

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    References listed on IDEAS

    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.
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    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


    asset allocation; discrete trading; use of derivatives;

    JEL classification:

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


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