Optimal portfolio under fast mean-reverting fractional stochastic environment

DOI10.1137/17M1134068zbMATH Open1410.91414arXiv1706.03139MaRDI QIDQ4579834FDOQ4579834

Authors: Jean-Pierre Fouque, Ruimeng Hu 

Publication date: 10 August 2018

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: Empirical studies indicate the existence of long range dependence in the volatility of the underlying asset. This feature can be captured by modeling its return and volatility using functions of a stationary fractional Ornstein--Uhlenbeck (fOU) process with Hurst index $Hin(frac12,1)$. In this paper, we analyze the nonlinear optimal portfolio allocation problem under this model and in the regime where the fOU process is fast mean-reverting. We first consider the case of power utility, and rigorously give first order approximations of the value and the optimal strategy by a martingale distortion transformation. We also establish the asymptotic optimality in all admissible controls of a zeroth order trading strategy. Then, we extend the discussions to general utility functions using the epsilon-martingale decomposition technique, and we obtain similar asymptotic optimality results within a specific family of admissible strategies.

Full work available at URL: https://arxiv.org/abs/1706.03139

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zbMATH Keywords

long-range dependenceoptimal portfolioasymptotic optimalityfractional Ornstein-Uhlenbeck processmartingale distortion

Mathematics Subject Classification ID

Fractional processes, including fractional Brownian motion (60G22) Portfolio theory (91G10) Martingales with continuous parameter (60G44) Optimal stochastic control (93E20)

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Cited In (24)

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• Optimal reinsurance-investment with loss aversion under rough Heston model
• Portfolio Optimization under Fast Mean-Reverting and Rough Fractional Stochastic Environment
• Asymptotic optimal strategy for portfolio optimization in a slowly varying stochastic environment
• Partial hedging in rough volatility models
• Optimal hedging under fast-varying stochastic volatility
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• On the optimal forecast with the fractional Brownian motion
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