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Dynamic mean-variance asset allocation

Journal

Review of Financial Studies

Subject

Finance

Publishing details

Review of Financial Studies 2010 Vol 23:8 p 2970-3016

Authors / Editors

Basak S;Chabakauri G

Biographies

Suleyman Basak

Publication Year

2010

Abstract

We solve the dynamic mean-variance portfolio problem and derive its time-consistent solution using dynamic programming. Previous literature, in contrast, only determines either myopic or precommitment (committing to follow the initially optimal policy) solutions. We provide a fully analytical simple characterization of the dynamically optimal mean-variance portfolios within a general incomplete-market economy. We also identify a probability measure that incorporates intertemporal hedging demands and facilitates tractability. We illustrate this by easily computing portfolios explicitly under various stochastic investment opportunities. A calibration exercise shows that the mean-variance hedging demands are economically significant.

Publication Notes

This article previously appeared in the IFA Working Paper Series FIN 484

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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