2269. How bad is myopia for a mean-variance investor?
Invited abstract in session WA-7: Understanding and Measuring Risk: Macroeconomic and Financial Perspectives, stream Risk Management in Commodities and Financial Markets .
Wednesday, 8:30-10:00Room: Clarendon GR.01
Authors (first author is the speaker)
| 1. | Jinye Du
|
| College of Business, Southern University of Science and Technology | |
| 2. | Zhongfei Li
|
| College of Business, Southern University of Science and Technology | |
| 3. | Moris Strub
|
| Warwick Business School |
Abstract
The mean-variance framework is widely used in portfolio selection but often overlooks the investment horizon. Current investment practices rely on myopic mean-variance approaches that neglect long-term considerations. Existing algorithms solve single-period mean-variance problems and extend the solution over time. This paper contributes to the existing research by incorporating a time dimension. In this paper, we derive a equilibrium mean-variance strategy under time-varying constrain for terminal wealth and compare the out-of-sample performance of the myopic strategy, dynamic mean-variance strategy and equilibrium mean-variance strategy with three 1/N-type strategies. The preliminary results demonstrate that the dynamic mean-variance strategy outperforms the myopic approach in out-of-sample scenarios. Additionally, we highlight the benefits of optimization in a dynamic context compared to naive diversification.
Keywords
- Financial Modelling
- Dynamical Systems
- Decision Analysis
Status: accepted
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