Iterated expectations in RiskyContrib #1058
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Since the REMARK has now been published, I took the opportunity to edit the file header and link to it. |
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Massive thanks to @alanlujan91, as I decided to implement this trick after reviewing his code for the housing project. |
Codecov Report
@@ Coverage Diff @@
## master #1058 +/- ##
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+ Coverage 71.71% 71.85% +0.13%
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Files 66 66
Lines 9989 10042 +53
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+ Hits 7164 7216 +52
- Misses 2825 2826 +1
Continue to review full report at Codecov.
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@mnwhite are you able to review this? |
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There is a speed-up trick that can be used in portfolio problems when income is independent of the risky return. This is already incorporated in
ConsPortfolio, but I had not applied it toRiskyContrib.The trick is to use iterated expectations when computing the expectation of value (and derivatives) next period. The idea is to create a function that interpolates
E[f(income, R)|R]and then integrate it overR, instead of jointly integrating overincomeandR. Turns out that---in this model---this change makes the solution 3x-5x faster.This PR introduces this trick into
RiskyContrib's solver. I left the general solver for cases where income and returns are correlated as an option.