Portfolio optimization with stochastic volatilities and constraints: an application in high dimension

DOI10.1007/S00245-007-0896-3MaRDI QIDQ2471704zbMATH OpenOpenAlexFDO

Authors Mohamed Mnif

Publication date 18 February 2008

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00245-007-0896-3

zbMATH Keywords

numerical convex optimizationoptimal portfoliosemilinear partial differential equationsmooth solutionstochastic volatility

Mathematics Subject Classification ID

Applications of stochastic analysis (to PDEs, etc.) (60H30) Portfolio theory (91G10) Optimal stochastic control (93E20)

Review text

The author considers an investment problem with stochastic volatilities and portfolio constraints on amounts. The risky assets are modelled by high-dimensional (\(>3\)) jump diffusion processes, and the utility function is exponential. The objective is to maximize the expected utility from the investor terminal wealth. As long as the value function is a viscosity solution of an integro-differential HJB equation, which can not be solved explicitly, the author reduces the nonlinearity of the HJB equation to a semilinear equation. The existence of a smooth solution to the latter equation is proved and a verification theorem is stated to relate the solution to the value function. The optimal investment strategy is also obtained.

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