Article2009

Dynamic Asset Allocation: Portfolio Decomposition Formula and Applications

Jerome B. Detemple · Marcel Rindisbacher

64 citations0/0 files storedReview of Financial Studies

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Stochastic processes and financial applications Financial Markets and Investment Strategies Risk and Portfolio Optimization

Abstract

A new decomposition of the optimal portfolio, in dynamic models with von Neumann–Morgenstern preferences and Ito prices, is established. The formula rests on a change of numéraire that uses pure discount bonds as units of account. The dynamic hedging demand has two components. The first hedge insures against fluctuations in an optimally designed bond with a maturity date matching the investor's horizon. The second hedge immunizes against fluctuations in the market price of risk in the bond numéraire. Various applications are examined. New results concerning the behavior of extremely risk-averse individuals, the demand for bonds and its long-horizon limit, and the optimal portfolio in incomplete markets are derived.

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1977An equilibrium characterization of the term structure 1971Optimum consumption and portfolio rules in a continuous-time model 2000Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles 1992Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation 1979An intertemporal asset pricing model with stochastic consumption and investment opportunities 1966Aspects of the Theory of Risk-Bearing.1989Optimal consumption and portfolio policies when asset prices follow a diffusion process 1995The Malliavin Calculus and Related Topics

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