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Explicit solution to dynamic portfolio choice problem : The continuous-time detour

Listed author(s):
  • Fran\c{c}ois Legendre


  • Djibril Togola


This paper solves the dynamic portfolio choice problem. Using an explicit solution with a power utility, we construct a bridge between a continuous and discrete VAR model to assess portfolio sensitivities. We find, from a well analyzed example that the optimal allocation to stocks is particularly sensitive to Sharpe ratio. Our quantitative analysis highlights that this sensitivity increases when the risk aversion decreases and/or when the time horizon increases. This finding explains the low accuracy of discrete numerical methods especially along the tails of the unconditional distribution of the state variable.

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Paper provided by in its series Papers with number 1504.03079.

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Date of creation: Apr 2015
Handle: RePEc:arx:papers:1504.03079
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