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arXiv · 1504.03079

Explicit solution to dynamic portfolio choice problem : The continuous-time detour

François Legendre·Djibril Togola
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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.

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François Legendre, Djibril Togola. 2015-04-13. Explicit solution to dynamic portfolio choice problem : The continuous-time detour. https://doi.org/10.13140/2.1.4715.3449

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