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


  • Franc{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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  • Franc{c}ois Legendre & Djibril Togola, 2015. "Explicit solution to dynamic portfolio choice problem : The continuous-time detour," Papers 1504.03079,
  • Handle: RePEc:arx:papers:1504.03079

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