A Stochastic Programming Approach for Multi-Period Portfolio Optimization

Alois Geyer, Michael Hanke, Alex Weissensteiner

Publication: Scientific journalJournal articlepeer-review

Abstract

This paper extends previous work on the use of stochastic linear programming to solve life-cycle investment problems. We combine the feature of asset return predictability with practically relevant constraints arising in a life-cycle investment context. The objective is to maximize the expected utility of consumption over the lifetime and of bequest at the time of death of the investor. Asset returns and state variables follow a first-order vector auto-regression and the associated uncertainty is described by discrete scenario trees. To deal with the long time intervals involved in life-cycle problems we consider a few short-term decisions (to exploit any short-term return predictability), and incorporate a closed-form solution for the long, subsequent steady-state period to account for end effects.
Original languageEnglish
Pages (from-to)187 - 208
JournalComputational Management Science
Volume6
Issue number2
Publication statusPublished - 1 Jul 2009

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 101015 Operations research
  • 502025 Econometrics
  • 502

Cite this