Investing for the Long Run

38 Pages Posted: 11 May 2017 Last revised: 29 Mar 2019

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Jin Sun

University of Technology Sydney (UTS)

Date Written: May 29, 2018

Abstract

A major problem in financial engineering is investing on financial markets for long horizons. At infinite horizons, dynamic versions of the Kelly strategy are mathematically certain to maximize growth, such that these growth-optimal portfolios outperform all other investment strategies. This paper studies investing under finite but long horizons. We define a generalized form of stochastic discount factor (SDF), draw attention to the importance that it is tradeable, and to the related minimum price to generate a target payoff by investing. This leads us to the tradeable SDF that is the inverse of the growth-optimal portfolio. We then show that long-run optimal wealth evolution is closely linked to dynamic versions of Kelly strategies. Finally, we illustrate that our new framework leads to improved risk-return tradeoffs in long-term investments.

Keywords: stochastic discount factor, minimum pricing, optimal portfolio, growth optimal portfolio, dynamic Kelly strategy

JEL Classification: G11, G13

Suggested Citation

Leisen, Dietmar P. J. and Platen, Eckhard and Sun, Jin, Investing for the Long Run (May 29, 2018). Available at SSRN: https://ssrn.com/abstract=2966292 or http://dx.doi.org/10.2139/ssrn.2966292

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

Jakob-Welder-Weg 9
Mainz, D-55099
Germany
++49-6131-39 22097 (Phone)
++49-6131-39 23971 (Fax)

HOME PAGE: http://www.finserv.bwl.uni-mainz.de/index_ENG.php

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

Broadway
GPO Box 123
Sydney, NSW 2007, 2007
Australia
+61 2 9514 7759 (Phone)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

P.O. Box 123
Broadway
Sydney, New South Wales 2007
Australia
+61 (02) 9514 2271 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jin Sun

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

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