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http://dx.doi.org/10.7858/eamj.2022.017

OPTIMAL PORTFOLIO CHOICE IN A BINOMIAL-TREE AND ITS CONVERGENCE  

Jeong, Seungwon (Department of Financial Engineering, School of Business, Ajou University)
Ahn, Sang Jin (Department of Financial Engineering, School of Business, Ajou University)
Koo, Hyeng Keun (Department of Financial Engineering, School of Business, Ajou University)
Ahn, Seryoong (Division of Business Administration, Pukyong National University)
Publication Information
East Asian mathematical journal / v.38, no.3, 2022 , pp. 277-292 More about this Journal
Abstract
This study investigates the convergence of the optimal consumption and investment policies in a binomial-tree model to those in the continuous-time model of Merton (1969). We provide the convergence in explicit form and show that the convergence rate is of order ∆t, which is the length of time between consecutive time points. We also show by numerical solutions with realistic parameter values that the optimal policies in the binomial-tree model do not differ significantly from those in the continuous-time model for long-term portfolio management with a horizon over 30 years if rebalancing is done every 6 months.
Keywords
Optimal strategy; lifetime asset allocation; utility maximization; binomial tree model; convergence rate;
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Times Cited By KSCI : 1  (Citation Analysis)
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