Merton's model of optimal portfolio in a Black-Scholes market driven by a fractional Brownian motion with short-range dependence (Q817295)

This paper considers Merton's optimal portfolio selection problem, where the driving process is a fractional Brownian motion with Hurst index less than \(\frac12\); hence, the model incorporates sort-range dependence describing the market volatility. In order to solve the stochastic optimal control problem, the author transforms it to a non-random optimization problem and applies the Taylor expansion of fractional order. He also compares the obtained results with the results of other authors who use a fractional Brownian motion with Hurst index greater than \(\frac12\), incorporating long-range dependencies. The application of fractional Brownian motion in finance should be handled with great care; it might lead to arbitrage opportunities, see \textit{L. C. G. Rogers} [Math. Finance 7, No.1, 95--105 (1997; Zbl 0884.90045)], while some definitions of portfolios in fractional Brownian motion models are economically meaningless, see \textit{T. Björk} and \textit{H. Hult} [Finance Stoch. 9, No.~2, 197--209 (2005; Zbl 1092.91021)].