Time Consistent Behavior Portfolio Policy for Dynamic Mean-Variance Formulation

20 Pages Posted: 14 Aug 2014

See all articles by Xiangyu Cui

Xiangyu Cui

Shanghai University of Finance and Economics - School of Statistics and Management

Xun Li

Hong Kong Polytechnic University

Duan Li

Chinese University of Hong Kong; City University of Hong Kong

Yun Shi

Shanghai University

Date Written: August 14, 2014

Abstract

When we implement a portfolio selection methodology under a mean-risk formulation, it is essential to correctly model investors' risk aversion which may be time-dependent, or even state-dependent during the investment procedure. In this paper, we propose a behavior risk aversion model, which is a piecewise linear function of the current wealth level with a reference point at a preset investment target. Due to the time inconsistency of the resulting multi-period mean-variance model with an adaptive risk aversion, we investigate in this paper the time consistent behavior portfolio policy by solving a nested mean-variance game formulation. We derive semi-analytical time consistent behavior portfolio policy which takes a piecewise linear feedback form of the current wealth level with respect to the discounted investment target.

Keywords: risk aversion, mean-variance formulation, time consistent behavior portfolio policy.

JEL Classification: G11

Suggested Citation

Cui, Xiangyu and Li, Xun and Li, Duan and Li, Duan and Shi, Yun, Time Consistent Behavior Portfolio Policy for Dynamic Mean-Variance Formulation (August 14, 2014). Available at SSRN: https://ssrn.com/abstract=2480299 or http://dx.doi.org/10.2139/ssrn.2480299

Xiangyu Cui (Contact Author)

Shanghai University of Finance and Economics - School of Statistics and Management ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Xun Li

Hong Kong Polytechnic University ( email )

The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong

Duan Li

City University of Hong Kong

Tat Chee Avenue
Kowloon Tong
Kowloon
Hong Kong
852 3442 8591 (Phone)

Chinese University of Hong Kong ( email )

Shatin, New Territories
Hong Kong

Yun Shi

Shanghai University ( email )

SHANGDA ROAD 99
Shanghai, SHANGHAI 200444
China

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