In this paper, a link between a time-consistent and a pre-commitment investment strategy is established. We define an implied investment target, which is implicitly con- tained in a time-consistent strategy at a given time step and wealth level. By imposing the implied investment target at the initial time step on a time-consistent strategy, we form a hybrid strategy which may generate better mean-variance efficient frontiers than the time-consistent strategy. We extend the numerical algorithm proposed in Cong and Oosterlee (2016b) to solve constrained time-consistent mean-variance optimization pro- blems. Since the time-consistent and the pre-commitment strategies generate different terminal wealth distributions, time-consistency is not always inferior to pre-commitment.
Additional Metadata
Keywords Finance, Investment analysis, Decision analysis, Simulation, Time-consistency
THEME Computation (theme 10)
Publisher Elsevier
Persistent URL dx.doi.org/10.1016/j.jedc.2016.07.010
Journal Journal of Economic Dynamics and Control
Citation
Cong, F, & Oosterlee, C.W. (2016). On pre-commitment aspects of a time-consistent strategy for a mean-variance investor. Journal of Economic Dynamics and Control, 70, 178–193. doi:10.1016/j.jedc.2016.07.010