Efficiency of Dynamic Portfolio Choices: An Experiment

Jacopo Magnani, Jean Paul Rabanal (), Olga A. Rud and Yabin Wang
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Jacopo Magnani: EM - EMLyon Business School

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Abstract: We study the efficiency of dynamic portfolio choices using the nonparametric methods of Dybvig (1988) Post (2003). We compare a dynamic portfolio task against an equivalent static Arrow-Debreu problem under two alternative environments: (1) nonpooled with 2 T terminal states and (2) pooled with T +1 unique terminal states. The results suggest that, within each environment, efficiency is lower in a static format and when the number of final states is larger. In the nonpooled dynamic task, which allows for path dependent strategies, we find that a form of stop-loss strategy drives efficiency losses.

Date: 2022-03-01
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Published in Review of Financial Studies, 2022, 35 (3), 1279-1309 p

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