Time-inconsistency with rough volatility
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Publication:5019592
DOI10.1137/20M136654XzbMATH Open1480.91266arXiv1907.11378MaRDI QIDQ5019592FDOQ5019592
Authors: Bingyan Han, Hoi Ying Wong 
Publication date: 10 January 2022
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: In this paper, we consider equilibrium strategies under Volterra processes and time-inconsistent preferences embracing mean-variance portfolio selection (MVP). Using a functional It^o calculus approach, we overcome the non-Markovian and non-semimartingale difficulty in Volterra processes. The equilibrium strategy is then characterized by an extended path-dependent Hamilton-Jacobi-Bellman equation system under a game-theoretic framework. A verification theorem is provided. We derive explicit solutions to three problems, including MVP with constant risk aversion, MVP for log returns, and a mean-variance objective with a linear controlled Volterra process. We also thoroughly examine the effect of volatility roughness on equilibrium strategies. Numerical experiments demonstrate that trading rules with rough volatility outperform the classic counterparts.
Full work available at URL: https://arxiv.org/abs/1907.11378
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time-inconsistencymean-variance portfolio selectionrough volatilityVolterra Heston modelfunctional Itô calculus
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