A Dynamic Mean-Variance Analysis for Log Returns

Min Dai (), Hanqing Jin (), Steven Kou () and Yuhong Xu ()
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Min Dai: Department of Mathematics, Risk Management Institute, and Suzhou Research Institute, National University of Singapore, Singapore 119076
Hanqing Jin: Oxford-Nie Financial Big Data Laboratory, Mathematical Institute, University of Oxford, Oxford OX2 6GG, United Kingdom
Steven Kou: Department of Finance, Questrom School of Business, Boston University, Boston, Massachusetts 02215
Yuhong Xu: Center for Financial Engineering, Math Center for Interdiscipline Research, and School of Mathematical Sciences, Soochow University, Suzhou 215006, P.R. China

Management Science, 2021, vol. 67, issue 2, 1093-1108

Abstract: We propose a dynamic portfolio choice model with the mean-variance criterion for log returns. The model yields time-consistent portfolio policies and is analytically tractable even under some incomplete market settings. The portfolio policies conform with conventional investment wisdom (e.g., richer people should invest more absolute amounts of money in risky assets; the longer the investment time horizon, the more proportional amount of money should be invested in risky assets; and for long-term investment, people should not short-sell major stock indices whose returns are higher than the risk-free rate), and the model provides a direct link with the constant relative risk aversion utility maximization in a complete market. This paper was accepted by Kay Giesecke, finance.

Keywords: portfolio choices; stochastic volatility; time-varying mean returns; risk aversion recovery (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:2:p:1093-1108

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