Time consistent behavioral portfolio policy for dynamic mean-variance formulation

Xiangyu Cui, Xun Li, Duan Li, Yun Shi

Research output: Journal article publicationJournal articleAcademic researchpeer-review


When one considers an optimal portfolio policy under a mean-risk formulation, it is essential to correctly model investors' risk aversion which may be time variant or even state dependent. In this paper, we propose a behavioral risk aversion model, in which risk aversion is a piecewise linear function of the current excess wealth level with a reference point at the discounted investment target (either surplus or shortage), to reflect a behavioral pattern with both house money and break-even effects. Due to the time inconsistency of the resulting multi-period mean-variance model with adaptive risk aversion, we investigate the time consistent behavioral portfolio policy by solving a nested mean-variance game formulation. We derive a semi-analytical time consistent behavioral portfolio policy which takes a piecewise linear feedback form of the current excess wealth level with respect to the discounted investment target. Finally, we extend the above results to time consistent behavioral portfolio selection for dynamic mean-variance formulation with a cone constraint.
Original languageEnglish
Pages (from-to)1647-1660
Number of pages14
JournalJournal of the Operational Research Society
Issue number12
Publication statusPublished - 1 Dec 2017


  • behavioral portfolio policy
  • dynamic mean-variance formulation
  • investment analysis
  • state-dependent risk aversion
  • time consistency

ASJC Scopus subject areas

  • Management Information Systems
  • Strategy and Management
  • Management Science and Operations Research
  • Marketing

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