ON TIME CONSISTENCY FOR MEAN-VARIANCE PORTFOLIO SELECTION

Elena Vigna
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Elena Vigna: University of Torino and Collegio Carlo Alberto, Italy2Corso Unione Sovietica 218 bis, 10134, Torino, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 06, 1-22

Abstract: This paper addresses a comparison between different approaches to time inconsistency for the mean-variance portfolio selection problem. We define a suitable intertemporal preferences-driven reward and use it to compare three common approaches to time inconsistency for the mean-variance portfolio selection problem over [t0,T]: precommitment approach, consistent planning or game theoretical approach, and dynamically optimal approach. We prove that, while the precommitment strategy beats the other two strategies (that is a well-known obvious result), the consistent planning strategy dominates the dynamically optimal strategy until a time point t∗∈ (t 0,T) and is dominated by the dynamically optimal strategy from t∗ onwards. Existence and uniqueness of the break even point t∗ is proven.

Keywords: Time inconsistency; dynamic programming; Bellman’s optimality principle; precommitment approach; consistent planning approach; mean-variance portfolio selection (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024920500429

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