Pre-commitment vs. time-consistent strategies for the generalized multi-period portfolio optimization with stochastic cash flows

Zhongbao Zhou, Helu Xiao, Jialing Yin, Ximei Zeng and Ling Lin

Insurance: Mathematics and Economics, 2016, vol. 68, issue C, 187-202

Abstract: In this paper, we propose a multi-period portfolio optimization model with stochastic cash flows. Under the mean–variance preference, we derive the pre-commitment and time-consistent investment strategies by applying the embedding scheme and backward induction approach, respectively. We show that the time-consistent strategy is identical to the optimal open-loop strategy. Also, under the exponential utility preference, we develop the optimal strategy for multi-period investment, which is time-consistent. We show that the above two time-consistent strategies are equivalent in some cases. We compare the pre-commitment and time-consistent strategies under different situations with some numerical simulations. The results indicate that the time-consistent strategy is more stable and secure than pre-commitment strategy under the generalized mean–variance criterion.

Keywords: Portfolio choice; Stochastic cash flows; Pre-commitment strategy; Time-consistent strategy; Exponential utility (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:68:y:2016:i:c:p:187-202

DOI: 10.1016/j.insmatheco.2016.03.002

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