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Discrete-Time Implementation of Continuous-Time Portfolio Strategies

Listed author(s):
  • 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)

Registered author(s):

    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

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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 393.

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    Date of creation: 04 Jul 2006
    Handle: RePEc:sce:scecfa:393
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