Analytical Approximation for a Multi-Period Portfolio Problem With Vector Autoregressive Returns

13 Pages Posted: 8 Mar 2007

See all articles by Ales Ahcan

Ales Ahcan

University of Ljubljana - Faculty of Economics

Saao Polanec

University of Ljubljana - Faculty of Economics

Igor Masten

University of Ljubljana - Faculty of Economics

Mihael Perman

University of Ljubljana

Date Written: March 4, 2007

Abstract

This paper develops an analytical approximation, based on conditioning on the first order Taylor series expansion, for the distribution function of a terminal value of a series of constant mix portofolio investments placed over fixed time horizon for the case when log-returns of assets follow a p-th order vector autoregressive process. The results of the numerical simulation based on realistic parameters of the process of returns indicate extremely good fit between the approximating procedure and Monte Carlo simulation.

Keywords: Taylor conditioned approximation, vector autoregressive returns, multi-period portfolio return

JEL Classification: g11,c60

Suggested Citation

Ahcan, Ales and Polanec, Saso and Masten, Igor and Perman, Mihael, Analytical Approximation for a Multi-Period Portfolio Problem With Vector Autoregressive Returns (March 4, 2007). Available at SSRN: https://ssrn.com/abstract=968191 or http://dx.doi.org/10.2139/ssrn.968191

Ales Ahcan (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Saso Polanec

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Igor Masten

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Mihael Perman

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

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