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The Exact Solution of Multi-period Portfolio Choice Problem with Exponential Utility

In: Operations Research Proceedings 2014

Author

Listed:
  • Taras Bodnar

    (University of Stockholm)

  • Nestor Parolya

    (Leibniz University Hannover)

  • Wolfgang Schmid

    (European University Viadrina)

Abstract

In the current paper we derive the exact analytical solution of the multi-period portfolio choice problem for an exponential utility function. It is assumed that the asset returns depend on predictable variables and that the joint random process of the asset returns follows a vector autoregression. We prove that the optimal portfolio weights depend on the covariance matrices of the next two periods and the conditional mean vector of the next period. The case without predictable variables and the case of independent asset returns are partial cases of our solution.

Suggested Citation

  • Taras Bodnar & Nestor Parolya & Wolfgang Schmid, 2016. "The Exact Solution of Multi-period Portfolio Choice Problem with Exponential Utility," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 45-51, Springer.
    • Handle: RePEc:spr:oprchp:978-3-319-28697-6_7
    DOI: 10.1007/978-3-319-28697-6_7
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