Discrete-Time Implementation of Continuous-Time Portfolio Strategies

Beate Breuer (), Nicole Branger and Christian Schlag
Additional contact information
Beate Breuer: Graduate Program 'Finance and Monetary Economics', Goethe-University Frankfurt
Nicole Branger: Department of Business and Economics, University of Southern Denmark

No 393, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: Since trading cannot take place continuously, the optimal portfolio calculated in a continuous-time model cannot be held, but the investor has to implement the continuous-time strategy in discrete time. This leads to the question how severe the resulting discretization error is. We analyze this question in a simulation study for a variety of models. First, we show that discrete trading can be neglected if only the stock and the money market account are traded, even in models with additional risk factors like stochastic volatility and jump risk in the stock and in volatility. Second, we show that the opposite is true if derivatives are traded. In this case, the utility loss due to discrete trading may be much larger than the utility gain from having access to derivatives. To profit from trading derivatives, the investor has to rebalance his portfolio at least every day

Keywords: Asset Allocation; Discrete Trading; Use of Derivatives (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2006-07-04
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Discrete-time implementation of continuous-time portfolio strategies (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:393

Access Statistics for this paper

More papers in Computing in Economics and Finance 2006 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().