Static Mean-Variance Analysis with Uncertain Time Horizon

We generalize Markowitz analysis to the situations involving an uncertain exit time.

Author(s):

Lionel Martellini

Professor of Finance and Scientific Director of the EDHEC Risk and Asset Management Research Centre

Branko Uroevic

Department of Economics and Business, Universitat Pompeu Fabra, Barcelona

Our approach preserves the form of the original problem in that an investor minimizes portfolio variance for a given level of the expected return. However, inputs are now given by the generalized expressions for mean and variance-covariance matrix involving moments of the random exit time in addition to the conditional moments of asset returns. While efficient frontiers in the generalized and the standard Markowitz case may coincide under certain conditions, we demonstrate, by means of an example, that in general that is not true. In particular, portfolios efficient in the standard Markowitz sense can be inefficient in the generalized sense and vice versa. As a result, an investor facing an uncertain time-horizon and investing as if her time of exit is certain would in general make sub-optimal portfolio allocation decisions. Numerical simulations show that a significant efficiency loss can be induced by an improper use of standard mean-variance analysis when time-horizon is uncertain.

Type: Working paper
Date: le 04/07/2005
Research Cluster : Finance

See Also

(Invitation) Inauguration of the Management in Innovative Health Chair - May 30, 2022 in Paris
News
- 17-05-2022
Emmanuel Métais, Dean of EDHEC Business School and Christophe Durand, General Manager...
COMMUNIQUE DE PRESSE : FEMMES ET CARRIERE : QUELS SONT LEURS ATOUTS ET LEURS MOTIVATIONS
Press release
- 13-05-2022
Les femmes davantage authentiques flexibles sensibles et altruistes que les hommes dans...
COMMUNIQUE DE PRESSE : NEWGEN FOR IMPACT LA FIBRE ENTREPRENEURIALE DES NOUVELLES GENERATIONS UN POTENTIEL POUR LE NEW NORMAL
Press release
- 13-05-2022
Ne pas opposer la logique de croissance à la responsabilité sociétale, c'est ce que...
COMMUNIQUE DE PRESSE : 1er EMPLOI EN TEMPS DE CRISE
Press release
- 13-05-2022
Comment les jeunes diplômés ont-ils abordé la recherche de leur premier emploi dans un...