Working paper 6 is based largely on chapter 3 of Supel's University of Minnesota Ph.D. dissertation, "A two-period balance sheet model for banks."
Previous work on discrete time portfolio selection models encompassed (a) transaction's costs, and (b) uncertainty about cash flows during the first (and only) period. This paper extends these models by considering uncertainty about asset yields in the second period and the optimal strategy for portfolio selection over a two-period horizon. Among the implications are i) the optimal initial portfolio is, in general, diversified and contains more short-term assets than the myopic investor's portfolio, and ii) the shape of the mean-variance locus ensures diversification for all (two-moment) types of investors, except certain forms of risk lovers. Other partial derivatives are investigated.
- A two period balance sheet model for banks / Thomas M. Supel.
- Federal Reserve Bank of Minneapolis. Research Division.
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