Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility market model

DOI10.1137/21M1412281zbMATH Open1480.91269arXiv2104.06293OpenAlexW3152966437MaRDI QIDQ5019593FDOQ5019593

Authors:

Publication date: 10 January 2022

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

Abstract: In this paper, we consider the portfolio optimization problem in a financial market under a general utility function. Empirical results suggest that if a significant market fluctuation occurs, invested wealth tends to have a notable change from its current value. We consider an incomplete stochastic volatility market model, that is driven by both a Brownian motion and a jump process. At first, we obtain a closed-form formula for an approximation to the optimal portfolio in a small-time horizon. This is obtained by finding the associated Hamilton-Jacobi-Bellman integro-differential equation and then approximating the value function by constructing appropriate super-solution and sub-solution. It is shown that the true value function can be obtained by sandwiching the constructed super-solution and sub-solution. We also prove the accuracy of the approximation formulas. Finally, we provide a procedure for generating a close-to-optimal portfolio for a finite time horizon.

Full work available at URL: https://arxiv.org/abs/2104.06293

Recommendations

• Asymptotic approximation of optimal portfolio for small time horizons
• Merton's portfolio optimization problem in a Black and Scholes market with non‐Gaussian stochastic volatility of Ornstein‐Uhlenbeck type
• Portfolio optimization and stochastic volatility asymptotics
• A stochastic volatility model and optimal portfolio selection
• Optimal portfolio under fast mean-reverting fractional stochastic environment

zbMATH Keywords

Hamilton-Jacobi-Bellman equationportfolio optimizationutility functionquantitative financeLévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Portfolio theory (91G10) Optimal stochastic control (93E20)

Cites Work

• Optimum consumption and portfolio rules in a continuous-time model
• Transform Analysis and Asset Pricing for Affine Jump-diffusions
• Portfolio choice with jumps: a closed-form solution
• STOCHASTIC PORTFOLIO OPTIMIZATION WITH LOG UTILITY
• Portfolio optimization models on infinite-time horizon
• A solution approach to valuation with unhedgeable risks
• Robust mean variance portfolio selection model in the jump-diffusion financial market with an intractable claim
• PORTFOLIO OPTIMIZATION AND STOCHASTIC VOLATILITY ASYMPTOTICS
• Portfolio Optimization under Local-Stochastic Volatility: Coefficient Taylor Series Approximations and Implied Sharpe Ratio
• Infinitesimal generators for two-dimensional Lévy process-driven hypothesis testing
• Risk Sensitive Portfolio Optimization in a Jump Diffusion Model with Regimes
• Asymptotic Approximation of Optimal Portfolio for Small Time Horizons
• An approximation scheme for solution to the optimal investment problem in incomplete markets
• Sequential Hypothesis Testing in Machine Learning, and Crude Oil Price Jump Size Detection

Cited In (5)

• Asymptotics for multifactor Volterra type stochastic volatility models
• Monitoring parameter change for time series models with application to location-Scale heteroscedastic models
• Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility model with multiple correlated assets
• Projection and contraction method for the valuation of American options under regime switching
• Analysis of stock index with a generalized BN-S model: an approach based on machine learning and fuzzy parameters

This page was built for publication: Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility market model

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5019593)