Continuous-time Portfolio Selection Model Research Articles

Debiased Expert Opinions in Continuous Time Asset Allocation: Supplementary Material

This paper examines the effect of biased expert opinions on asset allocation. Expert opinions, such as brokerage research and analyst views, are an essential component of the asset management sector and an important research topic. However, the effect of behavioral biases on expert opinions is generally ignored. We find that biases have a significant impact on portfolios, explaining nearly half of the effect of expert opinions in our implementation. To address the impact of behavioral biases on expert opinions, we propose an integrated behavioral continuous time portfolio selection model which we solve in closed form. This model recommends general principles to identify and reduce the impact of five main behavioral biases. The model concludes with a new personal fractional Kelly decomposition to account for the effect of opinions on the optimal asset allocation.

A Reinterpretation of the Optimal Demand for Risky Assets in Fund Separation Theorems

In a continuous-time portfolio selection model with N risky assets and K state variables driving their risk and return parameters, we derive simple expressions for the allocation to each asset in the K + 1 risky funds of the (K + 2)-fund separation theorem. We show that the allocation to any given risky asset in each fund can be written in terms of the parameters of a regression of the excess returns of this asset on those of the N − 1 remaining assets. We also use these parameters to provide quantitative measures of the increase in Sharpe ratio of the speculative demand, or in the maximum correlation of each hedging demand with respect to the corresponding risk factor, associated with the introduction of a new asset in the investment universe. Finally, we show that in a multiperiod setting, an asset is “spanned” by others if and only if it improves neither the maximum Sharpe ratio of the speculative demand nor the maximum correlations of the hedging demands with the risk factors. This paper was accepted by Lauren Cohen, finance.

Estimating a continuous time portfolio selection model: An application with UK data

An empirical assessment of a continuous time portfolio selection model is studied for the UK economy between 1970 and 1996. The estimates obtained from this study are both statistically significant and consistent with the model's predictions. The estimate of risk aversion parameter refers to low risk aversion which is consistent with the optimal risky asset holding parameter. Furthermore, the estimated parameters of the asset pricing relationship are also found to be consistent with the historical values of the stock prices.