Autocorrelated returns and optimal intertemporal portfolio choice
Article Abstract:
A study was conducted to examine the influence of autocorrelated returns on intertemporal portfolio choice. In particular, this analysis determines the effect of autocorrelated returns on the distribution of wealth between a risky and a riskless asset over time by an individual investor who is saving for retirement or other substantial purchases. This analysis has certain similarities with Samuelson's 1991 paper but also differs because it employs a Gaussian ARMA (1,1) process along with an arbitrary deterministic process and a utility function with an arbitrary degree of constant absolute risk aversion. This study demonstrated that first-order serial correlation should be negative to yield the traditional age effect of mounting conservatism over the years. Moreover, it was discovered that dollar-cost averaging does not become an optimal policy for gradual entry into the risky asset.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1997
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Quadratic-variation-based dynamic strategies
Article Abstract:
A study is conducted to examine a family of dynamic trading strategies that are remarkable for their independence from stochastic process assumptions except for continuity and positivity assumptions. These trading strategies can be applied without forecasts of future volatilities. The study generalizes the Black-Scholes type of replication results to the trading strategies and explains the function of the quadratic variation, 'cumulative volatility,' in these strategies. It also demonstrates the application of the results to portfolio insurance without any definite expiration date. The study provides a method that avoids the 'volatility misspecification risk,' which is useful for models where replication in the ordinary sense is not possible.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1995
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