ON ROBUST MULTI-PERIOD PRE-COMMITMENT AND TIME-CONSISTENT MEAN-VARIANCE PORTFOLIO OPTIMIZATION

F. Cong () and Cornelis Oosterlee
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F. Cong: Delft Institute of Applied Mathematics, Delft University of Technology, Mekelweg 4, Delft, 2628 CD, The Netherlands

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 07, 1-26

Abstract: We consider robust pre-commitment and time-consistent mean-variance optimal asset allocation strategies, that are required to perform well also in a worst-case scenario regarding the development of the asset price. We show that worst-case scenarios for both strategies can be found by solving a specific equation each time step. In the unconstrained asset allocation case, the robust pre-commitment as well as the time-consistent strategy are identical to the corresponding robust myopic strategies, by which investors perform robust portfolio control only for one time step and conduct a risk-free strategy afterwards. In the experiments, the robustness of pre-commitment and time-consistent strategies is studied in detail. Our analysis and numerical results indicate that the time-consistent allocation strategy is more stable when possible incorrect assumptions regarding the future asset development are modeled and taken into account. In some situations, the time-consistent strategy can even generate higher efficient frontiers than the pre-commitment strategy (which is counter-intuitive), because the time-consistency restriction appears to protect an investor in such a situation.

Keywords: Robust optimization; mean-variance optimal asset allocation; target-based strategy; time-consistent strategy; model prediction error (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024917500492

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