Portolio choice for exponential investors when prices are mean-reverting
Abstract
Several asset classes show mean-reverting features, e.g. commodities, commodity futures, long-term safe assets (gold). We investigate the portfolio choice problem for investors with exponential utilities (=high risk aversion) as the investment horizon T tends to infinity. It turns out that the optimal equivalent safe rate grows in a superlinear way, depending on the strength of the mean-reversion effect. We cannot find the exact optimisers but construct a family of simple, explicit strategies that are optimal asymptotically (they generate equivalent safe rates of the optimal order). Interestingly, the presence or absence of a drift leads to entirely different conclusions, the nonzero drift case spectacularly outperforming the driftless one. Time permitting, we also review some [abstract cut off on source page]
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