Continuous-Time Portfolio Choice Under Monotone Mean-Variance Preferences—Stochastic Factor Case

Abstract

We consider an incomplete market with a nontradable stochastic factor and a continuous-time investment problem with an optimality criterion based on monotone mean-variance preferences. We formulate it as a stochastic differential game problem and use Hamilton–Jacobi–Bellman–Isaacs equations to find an optimal investment strategy and the value function. What is more, we show that our solution is also optimal for the classical Markowitz problem, and every optimal solution for the classical Markowitz problem is optimal also for the monotone mean-variance preferences. These results are interesting because the original Markowitz functional is not monotone, and it was observed that in the case of a static one-period optimization problem, the solutions for those two functionals (monotone mean variance and classical Markowitz) are different. In addition, we determine explicit Markowitz strategies in the square root factor models.