Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility market model
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Publication:5019593
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.
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Cited in
(7)- On asymptotic optimality of Merton's myopic portfolio strategies under time discretization
- Asymptotic approximation of optimal portfolio for small time horizons
- Analysis of stock index with a generalized BN-S model: an approach based on machine learning and fuzzy parameters
- Asymptotics for multifactor Volterra type stochastic volatility models
- Projection and contraction method for the valuation of American options under regime switching
- Analysis of optimal portfolio on finite and small-time horizons for a stochastic volatility model with multiple correlated assets
- Monitoring parameter change for time series models with application to location-Scale heteroscedastic models
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