Multi-Period Mean CVAR Asset Allocation: Is it Advantageous to be Time Consistent?
26 Pages Posted: 14 Mar 2019 Last revised: 18 Jul 2019
Date Written: February 21, 2019
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
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