Multi-Period Mean CVAR Asset Allocation: Is it Advantageous to be Time Consistent?

26 Pages Posted: 14 Mar 2019 Last revised: 18 Jul 2019

See all articles by Peter Forsyth

Peter Forsyth

University of Waterloo - David R. Cheriton School of Computer Science

Date Written: February 21, 2019

Abstract

We formulate the multi-period, time consistent mean-CVAR (Conditional Value at Risk) asset allocation problem in a form amenable to numerical computation. Our numerical algorithm can impose realistic constraints such as: no shorting, no-leverage, and discrete rebalancing. We focus on long term (i.e. 30 year) strategies, which would be typical of an investor in a Defined Contribution (DC) pension plan. A comparison with pre-commitment mean-CVAR strategies shows that adding the time consistent constraint compares unfavourably with the pure pre-commitment strategy. Since the pre-commitment strategy computed at time zero is identical to a time consistent strategy based on an alternative objective function, the pre-commitment mean-CVAR strategy is implementable in this case. Hence it would seem that there is little to be gained from enforcing time consistency.

Keywords: multi-period mean-CVAR, time consistent, pre-commitment, asset allocation

JEL Classification: G11, G22

Suggested Citation

Forsyth, Peter, Multi-Period Mean CVAR Asset Allocation: Is it Advantageous to be Time Consistent? (February 21, 2019). Available at SSRN: https://ssrn.com/abstract=3340194 or http://dx.doi.org/10.2139/ssrn.3340194

Peter Forsyth (Contact Author)

University of Waterloo - David R. Cheriton School of Computer Science ( email )

200 University Avenue West
Waterloo, ON
Canada

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