Groupe d’études et de recherche en analyse des décisions


Dynamic portfolio choices by simulation-and-regression: Revisiting the issue of value function vs portfolio weight recursions


Simulation-and-regression methods have been recently proposed to solve multi-period, dynamic portfolio choice problems. In the constant relative risk aversion (CRRA) framework, the |"value function recursion vs portfolio weight recursion" issue was previously examined in van Binsbergen and Brandt (2007) and Garlappi and Skoulakis (2009). We revisit this issue in the context of an alternative simulation-and-regression algorithmic approach which does not rely on Taylor series approximations of the value function. We find that, in this context, the portfolio weight recursion variant of the algorithm provides very precise results, is more reliable, and should be preferred to the value function recursion variant, especially for problems with long maturities and large risk-aversion levels.

, 30 pages