Analytical Approximation for a Multi-Period Portfolio Problem With Vector Autoregressive Returns
13 Pages Posted: 8 Mar 2007
Date Written: March 4, 2007
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
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