ON TIME CONSISTENCY FOR MEAN-VARIANCE PORTFOLIO SELECTION

This paper addresses a comparison between different approaches to time inconsistency for the mean-variance portfolio selection problem. We define a suitable intertemporal preferences-driven reward and use it to compare three common approaches to time inconsistency for the mean-variance portfolio sel...

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Published in:International journal of theoretical and applied finance 2020-09, Vol.23 (6), p.2050042
Main Author: VIGNA, ELENA
Format: Article
Language:English
Subjects:
Game theory
Inconsistency
Portfolio management
Uniqueness
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description This paper addresses a comparison between different approaches to time inconsistency for the mean-variance portfolio selection problem. We define a suitable intertemporal preferences-driven reward and use it to compare three common approaches to time inconsistency for the mean-variance portfolio selection problem over [ t 0 , T ] : precommitment approach, consistent planning or game theoretical approach, and dynamically optimal approach. We prove that, while the precommitment strategy beats the other two strategies (that is a well-known obvious result), the consistent planning strategy dominates the dynamically optimal strategy until a time point t ∗ ∈ ( t 0 , T ) and is dominated by the dynamically optimal strategy from t ∗ onwards. Existence and uniqueness of the break even point t ∗ is proven.
doi_str_mv 10.1142/S0219024920500429
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source International Bibliography of the Social Sciences (IBSS); Business Source Ultimate (EBSCOHost)
subjects Game theory
Inconsistency
Portfolio management
Uniqueness
title ON TIME CONSISTENCY FOR MEAN-VARIANCE PORTFOLIO SELECTION
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