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Discrete-Time Implementation of Continuous-Time Portfolio Strategies


  • 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)


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

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    References listed on IDEAS

    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.
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    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


    Asset Allocation; Discrete Trading; Use of Derivatives;

    JEL classification:

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


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