TY - JOUR
T1 - Optimal Policies for Investment with Time-Varying Return Distributions
AU - Donchev, Doncho S.
AU - Rachev, Svetlosar T.
AU - Steigerwald, Douglas G.
PY - 2002
Y1 - 2002
N2 - We develop a model in which investors must learn the distribution of asset returns over time. The process of learning is made more difficult by the fact that the distributions are not constant through time. We consider risk-neutral investors who have quadratic utility and are selecting between two risky assets. We determine the time at which it is optimal to update the distribution estimate and hence, alter portfolio weights. Our results deliver an optimal policy for asset allocation, that is, the sequence of time intervals at which it is optimal to switch between assets, based on stochastic optimal control theory. In addition, we determine the time intervals in which asset switching leads to a loss with high probability. We provide estimates of the effectiveness of the optimal policy.
AB - We develop a model in which investors must learn the distribution of asset returns over time. The process of learning is made more difficult by the fact that the distributions are not constant through time. We consider risk-neutral investors who have quadratic utility and are selecting between two risky assets. We determine the time at which it is optimal to update the distribution estimate and hence, alter portfolio weights. Our results deliver an optimal policy for asset allocation, that is, the sequence of time intervals at which it is optimal to switch between assets, based on stochastic optimal control theory. In addition, we determine the time intervals in which asset switching leads to a loss with high probability. We provide estimates of the effectiveness of the optimal policy.
KW - Asset allocation
KW - Optimal policy
KW - Stochastic control
KW - Two-armed Bandit problem
UR - http://www.scopus.com/inward/record.url?scp=0036039434&partnerID=8YFLogxK
U2 - 10.1023/A:1019954626395
DO - 10.1023/A:1019954626395
M3 - Article
AN - SCOPUS:0036039434
SN - 1521-1398
VL - 4
SP - 269
EP - 312
JO - Journal of Computational Analysis and Applications
JF - Journal of Computational Analysis and Applications
IS - 4
ER -