INITIAL INVESTMENT CHOICE AND OPTIMAL FUTURE ALLOCATIONS UNDER TIME-MONOTONE PERFORMANCE CRITERIA

M. Musiela () and T. Zariphopoulou ()
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M. Musiela: BNP Paribas, 10 Harewood Avenue, London NW1 6AA, UK
T. Zariphopoulou: Oxford-Man Institute of Quantitative Finance, Eagle House, Walton Well Road, Oxford OX2 6ED, UK;

International Journal of Theoretical and Applied Finance (IJTAF), 2011, vol. 14, issue 01, 61-81

Abstract: The paper offers a new perspective on optimal portfolio choice by investigating how and to what extent knowledge of an investor's desirable initial investment choice can be used to determine his future optimal portfolio allocations. Optimality of investment decisions is built on the so-called forward investment performance criteria and, in particular, on the time-monotone ones. It is shown that for this class of forward criteria the desired initial allocations completely characterize the future optimal investment strategies. The analysis uses the connection between a nonlinear equation, satisfied by the local risk tolerance, and the backward heat equation. Complete solutions are provided as well as various examples.

Keywords: Portfolio management; forward investment performance; time consistency; utility theory (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (12)

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DOI: 10.1142/S0219024911006267

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