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On horizon-consistent mean-variance portfolio allocation.
- Source :
-
Annals of Operations Research . May2024, Vol. 336 Issue 1/2, p797-828. 32p. - Publication Year :
- 2024
-
Abstract
- We analyze the problem of constructing multiple buy-and-hold mean-variance portfolios over increasing investment horizons in continuous-time arbitrage-free stochastic interest rate markets. The orthogonal approach to the one-period mean-variance optimization of Hansen and Richard (Econometrica 55(3):587–613, 1987) requires the replication of a risky payoff for each investment horizon. When many maturities are considered, a large number of payoffs must be replicated, with an impact on transaction costs. In this paper, we orthogonally decompose the whole processes defined by asset returns to obtain a mean-variance frontier generated by the same two securities across a multiplicity of horizons. Our risk-adjusted mean-variance frontier rests on the martingale property of the returns discounted by the log-optimal portfolio and features a horizon consistency property. The outcome is that the replication of a single risky payoff is required to implement such frontier at any investment horizon. As a result, when transaction costs are taken into account, our risk-adjusted mean-variance frontier may outperform the traditional mean-variance optimal strategies in terms of Sharpe ratio. Realistic numerical examples show the improvements of our approach in medium- or long-term cashflow management, when a sequence of target returns at increasing investment horizons is considered. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 02545330
- Volume :
- 336
- Issue :
- 1/2
- Database :
- Academic Search Index
- Journal :
- Annals of Operations Research
- Publication Type :
- Academic Journal
- Accession number :
- 177190153
- Full Text :
- https://doi.org/10.1007/s10479-022-04798-x