0000000000025976
AUTHOR
Eckhard Platen
Investing for the Long Run
This paper studies long term investing by an investor that maximizes either expected utility from terminal wealth or from consumption. We introduce the concepts of a generalized stochastic discount factor (SDF) and of the minimum price to attain target payouts. The paper finds that the dynamics of the SDF needs to be captured and not the entire market dynamics, which simplifies significantly practical implementations of optimal portfolio strategies. We pay particular attention to the case where the SDF is equal to the inverse of the growth-optimal portfolio in the given market. Then, optimal wealth evolution is closely linked to the growth optimal portfolio. In particular, our concepts allo…
A Top-Down Method for Long-Term Investing
This paper bases long-term investing on a tradeable stochastic discount factor (SDF), relates it to the growth optimal portfolio and argues for a top-down method, where modeling efforts are directed at capturing its long-run dynamics in a generalized setting. This differs from the common, cumbersome bottom-up method of modeling many risky securities in the marketplace. Various optimal portfolio strategies can be implemented efficiently using fractional expectations of the SDF. This paper illustrates empirically for the US stock market that the proposed method leads to higher wealth, higher returns on investment and higher long-term utility levels.