Statistical Learning for Individualized Asset Allocation

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Abstract

We establish a high-dimensional statistical learning framework for individualized asset allocation. Our proposed methodology addresses continuous-action decision-making with a large number of characteristics. We develop a discretization approach to model the effect of continuous actions and allow the discretization frequency to be large and diverge with the number of observations. We estimate the value function of continuous-action using penalized regression with our proposed generalized penalties that are imposed on linear transformations of the model coefficients. We show that our proposed Discretization and Regression with generalized fOlded concaVe penalty on Effect discontinuity (DROVE) approach enjoys desirable theoretical properties and allows for statistical inference of the optimal value associated with optimal decision-making. Empirically, the proposed framework is exercised with the Health and Retirement Study data in finding individualized optimal asset allocation. The results show that our individualized optimal strategy improves the financial well-being of the population. Supplementary materials for this article are available online.

Authors 3

1. Yi Ding Aachen

   Leiden University · University of Chinese Academy of Sciences · University of California, Los Angeles · University Medical Center Hamburg-Eppendorf · Sichuan University · Peking University · Nanfang Hospital · First Affiliated Hospital of Zhengzhou University · Guangdong Pharmaceutical University · First Affiliated Hospital of Soochow University · Center for Excellence in Molecular Plant Sciences

   Affiliation as printed

   Center for Excellence in Molecular Plant Sciences

   First Affiliated Hospital of Soochow University

   First Affiliated Hospital of Zhengzhou University

   Guangdong Pharmaceutical University

   Leiden University

   Nanfang Hospital

   Peking University

   Sichuan University

   University Medical Center Hamburg-Eppendorf

   University of California, Los Angeles

   University of Chinese Academy of Sciences

2. Yingying Li

   University of Alabama at Birmingham · Peking University · Zhengzhou University · Wenzhou Medical University · Tianjin Normal University · Guangzhou University of Chinese Medicine · Anhui Agricultural University

   Affiliation as printed

   Anhui Agricultural University

   Guangzhou University of Chinese Medicine

   Peking University

   Tianjin Normal University

   University of Alabama at Birmingham

   Wenzhou Medical University

   Zhengzhou University

3. Rui Song

   Zhengzhou University · China Agricultural University

   Affiliation as printed

   China Agricultural University

   Zhengzhou University