A Closed-Form Solution of the Multi-Period Portfolio Choice Problem for a Quadratic Utility Function
In the present paper, we derive a closed-form solution of the multi-period portfolio choice problem for a quadratic utility function with and without a riskless asset. All results are derived under weak conditions on the asset returns. No assumption on the correlation structure between different time points is needed and no assumption on the distribution is imposed. All expressions are presented in terms of the conditional mean vectors and the conditional covariance matrices. If the multivariate process of the asset returns is independent it is shown that in the case without a riskless asset the solution is presented as a sequence of optimal portfolio weights obtained by solving the single-period Markowitz optimization problem. The process dynamics are included only in the shape parameter of the utility function. If a riskless asset is present then the multi-period optimal portfolio weights are proportional to the single-period solutions multiplied by time-varying constants which are depending on the process dynamics. Remarkably, in the case of a portfolio selection with the tangency portfolio the multi-period solution coincides with the sequence of the simple-period solutions. Finally, we compare the suggested strategies with existing multi-period portfolio allocation methods for real data.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan Storud, 2004.
"A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability,"
NBER Working Papers
10934, National Bureau of Economic Research, Inc.
- Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
- BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen, 2003.
"Multivariate GARCH models: a survey,"
CORE Discussion Papers
2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
- Enrique Sentana & Dante Amegual, 2008.
"A Comparison Of Mean-Variance Efficiency Tests,"
- Celikyurt, U. & Ozekici, S., 2007. "Multiperiod portfolio optimization models in stochastic markets using the mean-variance approach," European Journal of Operational Research, Elsevier, vol. 179(1), pages 186-202, May.
- Jules Binsbergen & Michael Brandt, 2007. "Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function?," Computational Economics, Society for Computational Economics, vol. 29(3), pages 355-367, May.
- Mencía, Javier & Sentana, Enrique, 2009.
"Multivariate location-scale mixtures of normals and mean-variance-skewness portfolio allocation,"
Journal of Econometrics,
Elsevier, vol. 153(2), pages 105-121, December.
- Javier Mencía & Enrique Sentana, 2009. "Multivariate location-scale mixtures of normals and mean-variance-skewness portfolio allocation," Working Papers 0909, Banco de España;Working Papers Homepage.
- Enrique Sentana & Javier Mencía, 2008. "Multivariate Location-Scale Mixtures Of Normals And Mean-Variance-Skwness Portfolio Allocation," Working Papers wp2008_0805, CEMFI.
- Jondeau, E. & Rockinger, M., 2004.
"Optimal Portfolio Allocation Under Higher Moments,"
108, Banque de France.
- Gordon J. Alexander & Alexandre M. Baptista, 2004. "A Comparison of VaR and CVaR Constraints on Portfolio Selection with the Mean-Variance Model," Management Science, INFORMS, vol. 50(9), pages 1261-1273, September.
- Golosnoy, Vasyl & Ragulin, Sergiy & Schmid, Wolfgang, 2011. "CUSUM control charts for monitoring optimal portfolio weights," Computational Statistics & Data Analysis, Elsevier, vol. 55(11), pages 2991-3009, November.
- Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
- J. Tobin, 1958.
"Liquidity Preference as Behavior Towards Risk,"
Review of Economic Studies,
Oxford University Press, vol. 25(2), pages 65-86.
- Merton, Robert C. & Samuelson, Paul A., 1974. "Fallacy of the log-normal approximation to optimal portfolio decision-making over many periods," Journal of Financial Economics, Elsevier, vol. 1(1), pages 67-94, May.
- Ling, Shiqing & McAleer, Michael, 2003.
"Asymptotic Theory For A Vector Arma-Garch Model,"
Cambridge University Press, vol. 19(02), pages 280-310, April.
- 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.
- Leippold, Markus & Trojani, Fabio & Vanini, Paolo, 2004. "A geometric approach to multiperiod mean variance optimization of assets and liabilities," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1079-1113, March.
- Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
- Brandt, Michael W. & Santa-Clara, Pedro, 2004.
"Dynamic Portfolio Selection by Augmenting the Asset Space,"
University of California at Los Angeles, Anderson Graduate School of Management
qt632436gt, Anderson Graduate School of Management, UCLA.
- Michael W. Brandt & Pedro Santa-Clara, 2006. "Dynamic Portfolio Selection by Augmentingthe Asset Space," Journal of Finance, American Finance Association, vol. 61(5), pages 2187-2217, October.
- Michael W. Brandt & Pedro Santa-Clara, 2004. "Dynamic Portfolio Selection by Augmenting the Asset Space," NBER Working Papers 10372, National Bureau of Economic Research, Inc.
- Campbell Harvey & John Liechty & Merrill Liechty & Peter Muller, 2010. "Portfolio selection with higher moments," Quantitative Finance, Taylor & Francis Journals, vol. 10(5), pages 469-485.
- Frahm, Gabriel & Memmel, Christoph, 2010.
"Dominating estimators for minimum-variance portfolios,"
Journal of Econometrics,
Elsevier, vol. 159(2), pages 289-302, December.
- Gabriel Frahm & Christoph Memmel, 2010. "Dominating Estimators for Minimum-Variance Portfolios," Post-Print hal-00741629, HAL.
- 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.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Okhrin, Yarema & Schmid, Wolfgang, 2006. "Distributional properties of portfolio weights," Journal of Econometrics, Elsevier, vol. 134(1), pages 235-256, September.
- Zhenyu Wang, 2005. "A Shrinkage Approach to Model Uncertainty and Asset Allocation," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 673-705.
- Olha Bodnar, 2009. "Sequential Surveillance Of The Tangency Portfolio Weights," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(06), pages 797-810.
- Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, June.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1207.1003. 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: (arXiv administrators)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.