On the exact solution of the multi-period portfolio choice problem for an exponential utility under return predictability

Taras Bodnar, Nestor Parolya and Wolfgang Schmid

European Journal of Operational Research, 2015, vol. 246, issue 2, 528-542

Abstract: In this paper we derive the exact solution of the multi-period portfolio choice problem for an exponential utility function under return predictability. It is assumed that the asset returns depend on predictable variables and that the joint random process of the asset returns and the predictable variables follow a vector autoregressive process. We prove that the optimal portfolio weights depend on the covariance matrices of the next two periods and the conditional mean vector of the next period. The case without predictable variables and the case of independent asset returns are partial cases of our solution. Furthermore, we provide an exhaustive empirical study where the cumulative empirical distribution function of the investor’s wealth is calculated using the exact solution. It is compared with the investment strategy obtained under the additional assumption that the asset returns are independently distributed.

Keywords: Multi-period asset allocation; Expected utility optimization; Exponential utility function; Return predictability (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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Related works:
Working Paper: On the Exact Solution of the Multi-Period Portfolio Choice Problem for an Exponential Utility under Return Predictability (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:246:y:2015:i:2:p:528-542

DOI: 10.1016/j.ejor.2015.04.039

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