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Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function?

Publication ,  Journal Article
van Binsbergen, JH; Brandt, MW
Published in: Computational Economics
May 1, 2007

Most dynamic programming methods deployed in the portfolio choice literature involve recursions on an approximated value function. The simulation-based method proposed recently by Brandt, Goyal, Santa-Clara, and Stroud (Review of Financial Studies, 18, 831-873, 2005), relies instead on recursive uses of approximated optimal portfolio weights. We examine the relative numerical performance of these two approaches. We show that when portfolio weights are constrained by short sale restrictions for example, iterating on optimized portfolio weights leads to superior results. Value function iterations result in a lower variance but disproportionately higher bias of the solution, especially when risk aversion is high and the investment horizon is long. © Springer Science+Business Media, LLC 2006.

Duke Scholars

Published In

Computational Economics

DOI

EISSN

1572-9974

ISSN

0927-7099

Publication Date

May 1, 2007

Volume

29

Issue

3-4

Start / End Page

355 / 367

Related Subject Headings

  • Economics
  • 1502 Banking, Finance and Investment
  • 1499 Other Economics
  • 1403 Econometrics
 

Citation

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van Binsbergen, J. H., & Brandt, M. W. (2007). Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function? Computational Economics, 29(3–4), 355–367. https://doi.org/10.1007/s10614-006-9073-z
Binsbergen, J. H. van, and M. W. Brandt. “Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function?Computational Economics 29, no. 3–4 (May 1, 2007): 355–67. https://doi.org/10.1007/s10614-006-9073-z.
van Binsbergen JH, Brandt MW. Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function? Computational Economics. 2007 May 1;29(3–4):355–67.
van Binsbergen, J. H., and M. W. Brandt. “Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function?Computational Economics, vol. 29, no. 3–4, May 2007, pp. 355–67. Scopus, doi:10.1007/s10614-006-9073-z.
van Binsbergen JH, Brandt MW. Solving dynamic portfolio choice problems by recursing on optimized portfolio weights or on the value function? Computational Economics. 2007 May 1;29(3–4):355–367.
Journal cover image

Published In

Computational Economics

DOI

EISSN

1572-9974

ISSN

0927-7099

Publication Date

May 1, 2007

Volume

29

Issue

3-4

Start / End Page

355 / 367

Related Subject Headings

  • Economics
  • 1502 Banking, Finance and Investment
  • 1499 Other Economics
  • 1403 Econometrics