On pre-commitment aspects of a time-consistent strategy for a mean-variance investor

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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 languageEnglish
Pages (from-to)178-193
Number of pages16
JournalJournal of Economic Dynamics and Control
Volume70
DOIs
Publication statusPublished - 2016

Keywords

  • Decision analysis
  • Finance
  • Investment analysis
  • Simulation
  • Time-consistency

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