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

François Legendre and Djibril Togola
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Djibril Togola: ERUDITE

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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.

Date: 2015-04
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Related works:
Journal Article: Explicit solutions to dynamic portfolio choice problems: A continuous-time detour (2016)
Working Paper: Explicit solutions to dynamic portfolio choice problems: A continuous-time detour (2016)
Working Paper: Explicit solution to dynamic portfolio choice problem: the continuous-time detour (2015)
Working Paper: Explicit solutions to dynamic portfolio choice problems: A continuous-time detour (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1504.03079

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