Dynamic Portfolio Choice: A Simulation Approach

43 Pages Posted: 5 Jun 2001

See all articles by Michael W. Brandt

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Amit Goyal

University of Lausanne; Swiss Finance Institute

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 2001

Abstract

We present a simulation-based method for solving realistic portfolio choice problems that potentially involve non-standard preferences and a large number of assets with arbitrary return distribution. Specifically, the return distribution can be time-varying as a function of many observable or unobservable state variables and can even be path-dependent. Furthermore, the method is flexible enough to accommodate intermediate consumption, parameter and model uncertainty, and portfolio constraints. We first establish the properties of the method for the choice between a stock index and cash when the stock returns are either iid or predictable by the dividend yield. We then explore the optimal asset allocation across ten industry portfolios that exhibit momentum through its empirical pattern of own- and cross-serial correlations of returns.

Suggested Citation

Brandt, Michael W. and Goyal, Amit and Santa-Clara, Pedro, Dynamic Portfolio Choice: A Simulation Approach (May 2001). Available at SSRN: https://ssrn.com/abstract=271188 or http://dx.doi.org/10.2139/ssrn.271188

Michael W. Brandt

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amit Goyal

University of Lausanne ( email )

Batiment Extranef 226
Lausanne, Vaud CH-1015
Switzerland
+41 21 692 3676 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/agoyal/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Pedro Santa-Clara (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
702
Abstract Views
3,068
rank
40,388
PlumX Metrics