Portfolios and risk premia for the long run.

By Paolo Guasoni, Scott Robertson. 2012

56 citations recorded by the source corpus.

This paper develops a method to derive optimal portfolios and risk premia explicitly in a general diffusion model for an investor with power utility and a long horizon. The market has several risky assets and is potentially incomplete. Investment opportunities are driven by, and partially correlated with, state variables which follow an autonomous diffusion. The framework nests models of stochastic interest rates, return predictability, stochastic volatility and correlation risk. In models with several assets and a single state variable, long-run portfolios and risk premia admit explicit formulas up the solution of an ordinary differential equation which characterizes the principal eigenvalue of an elliptic operator. Multiple state variables lead to a quasilinear partial differential equation which is solvable for many models of interest. The paper derives the long-run optimal portfolio and the long-run optimal pricing measures depending on relative risk aversion, as well as their finite-horizon performance.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/8180ca917715908bf4c33d79358ecc2ca75652d0

Citations in the corpus

• DYNAMIC TRADING VOLUME (2012, unknown): “The large investor has constant relative risk aversion γ , and trades (i.e., chooses the turnover process (ut)t≥0) as to maximize expected utility from terminal wealth XuT at some long horizon T (cf. Dumas and Luciano 1991; Guasoni and Robertson 2012).”