IDEAS home Printed from https://ideas.repec.org/p/sce/scecfa/393.html
   My bibliography  Save this paper

Discrete-Time Implementation of Continuous-Time Portfolio Strategies

Author

Listed:
  • Beate Breuer

    () (Graduate Program 'Finance and Monetary Economics', Goethe-University Frankfurt)

  • Nicole Branger

    (Department of Business and Economics, University of Southern Denmark)

  • Christian Schlag

    (Finance Department, Goethe-University Frankfurt)

Abstract

Since trading cannot take place continuously, the optimal portfolio calculated in a continuous-time model cannot be held, but the investor has to implement the continuous-time strategy in discrete time. This leads to the question how severe the resulting discretization error is. We analyze this question in a simulation study for a variety of models. First, we show that discrete trading can be neglected if only the stock and the money market account are traded, even in models with additional risk factors like stochastic volatility and jump risk in the stock and in volatility. Second, we show that the opposite is true if derivatives are traded. In this case, the utility loss due to discrete trading may be much larger than the utility gain from having access to derivatives. To profit from trading derivatives, the investor has to rebalance his portfolio at least every day

Suggested Citation

  • Beate Breuer & Nicole Branger & Christian Schlag, 2006. "Discrete-Time Implementation of Continuous-Time Portfolio Strategies," Computing in Economics and Finance 2006 393, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:393
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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

    Keywords

    Asset Allocation; Discrete Trading; Use of Derivatives;

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:393. 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: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.