Explicit solutions to dynamic portfolio choice problems: A continuous-time detour

Abstract

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.

Portfolio Dynamics. A Macroeconomic Model

“…Faria and Correia-da-Silva (2012) research the relevance of stochastic volatility in the scope of dynamic portfolio choice. Legendret and Togola (2015) offer some explicit solution to dynamic portfolio choice issues. Princ studies the case of Central European countries in the regard of dynamic portfolio formations.…”

“…To have a complete and correct assessment of the current macroeconomic theory is important to take into account when analyzing, the evolution over time and the default elements of the data series in order to develop a model of complex technical methods (Legendret and Togola, 2015). The base model is built in the following, primarily starting with the assessment of the market demand, described by the results/outputs obtained in the economy and monetary market.…”