Abstract
In this paper, a link between a time-consistent and a pre-commitment investment strategy is established. We define an implied investment target, which is implicitly contained in a time-consistent strategy at a given time step and wealth level. By imposing the implied investment target at the initial time step on a time-consistent strategy, we form a hybrid strategy which may generate better mean-variance efficient frontiers than the time-consistent strategy. We extend the numerical algorithm proposed in Cong and Oosterlee (2016b) to solve constrained time-consistent mean-variance optimization problems. Since the time-consistent and the pre-commitment strategies generate different terminal wealth distributions, time-consistency is not always inferior to pre-commitment.
Original language | English |
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Pages (from-to) | 178-193 |
Number of pages | 16 |
Journal | Journal of Economic Dynamics and Control |
Volume | 70 |
DOIs | |
Publication status | Published - 2016 |
Keywords
- Decision analysis
- Finance
- Investment analysis
- Simulation
- Time-consistency