Asymptotic approximation of optimal portfolio for small time horizons

DOI10.1137/17M1111371zbMATH Open1396.91691OpenAlexW2795570552MaRDI QIDQ4579841FDOQ4579841

Authors Rohini Kumar, Hussein Nasralah

Publication date 10 August 2018

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

Full work available at URL https://arxiv.org/abs/1611.09300

zbMATH Keywords

portfolio optimizationprobabilitystochastic controlquantitative finance

Mathematics Subject Classification ID

Portfolio theory (91G10) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Martingales with continuous parameter (60G44) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We consider the problem of portfolio optimization in a simple incomplete market and under a general utility function. By working with the associated Hamilton-Jacobi-Bellman partial differential equation (HJB PDE), we obtain a closed-form formula for a trading strategy which approximates the optimal trading strategy when the time horizon is small. This strategy is generated by a first order approximation to the value function. The approximate value function is obtained by constructing classical sub- and super-solutions to the HJB PDE using a formal expansion in powers of horizon time. Martingale inequalities are used to sandwich the true value function between the constructed sub- and super-solutions. A rigorous proof of the accuracy of the approximation formulas is given. We end with a heuristic scheme for extending our small-time approximating formulas to approximating formulas in a finite time horizon.

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Cites work

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Cited in

(3)

• Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility model with multiple correlated assets
• Asymptotic expansion for a Black-Scholes model with small noise stochastic jump-diffusion interest rate
• Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility market model

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