Journal
JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY
Volume 74, Issue 1, Pages 195-208Publisher
TAYLOR & FRANCIS LTD
DOI: 10.1080/01605682.2022.2032428
Keywords
Portfolio selection; mean-variance formulation; time consistency in efficiency; self-financing; market with all risky assets
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The dynamic mean-variance formulation in the market lacks time consistency in efficiency. A new policy, called the TCIE policy, is developed to address the truncated time-horizon problem and avoid irrational investment behaviors, achieving better overall investment performance compared to existing policies.
The dynamic mean-variance formulation for a market with all risky assets is not time consistent in efficiency (TCIE), in the sense that the pre-committed policy, which is optimal for the entire investment horizon, could become mean-variance inefficient when facing a truncated time-horizon problem at an intermediate time instant. By removing the self-financing restriction and fully avoiding the irrational investment behaviours in intermediate time periods, we develop the TCIE dynamic mean-variance policy, which is TCIE. Comparing to the polices in the literature, such as the strictly dominating policy, the pre-committed policy and the time consistent policy, the TCIE policy can achieve better global investment performance.
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