Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230592
Authors: 
Koné, N'Golo
Year of Publication: 
2020
Series/Report no.: 
Queen’s Economics Department Working Paper No. 1439
Abstract: 
This paper addresses a multi-period portfolio selection problem when the number of assets in the financial market is large. Using an exponential utility function, the optimal solution is shown to be a function of the inverse of the covariance matrix of asset returns. Nonetheless, when the number of assets grows, this inverse becomes unreliable, yielding a selected portfolio that is far from the optimal one. We propose two solutions to this problem. First, we penalize the norm of the portfolio weights in the dynamic problem and show that the selected strategy is asymptotically efficient. Second, we penalize the norm of the difference of successive portfolio weights in the dynamic problem to guarantee that the optimal portfolio composition does not fluctuate widely between periods. This second method helps investors to avoid high trading costs in the financial market by selecting stable strategies over time. Extensive simulations and empirical results confirm that our procedures considerably improve the performance of the dynamic portfolio.
Subjects: 
Dynamic portfolio selection
Large Market
Asymptotic efficiency
Regularization
JEL: 
G11
C16
C52
Document Type: 
Working Paper

Files in This Item:
File
Size
550.16 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.