Sub- and supersolution approach to accuracy analysis of portfolio optimization asymptotics in multiscale stochastic factor markets

DOI10.1137/21M1428625zbMATH Open1483.91214arXiv2106.11510OpenAlexW4210689959MaRDI QIDQ5029934FDOQ5029934

Authors: Jean-Pierre Fouque, Ruimeng Hu, Ronnie Sircar 

Publication date: 15 February 2022

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

Abstract: The problem of portfolio optimization when stochastic factors drive returns and volatilities has been studied in previous works by the authors. In particular, they proposed asymptotic approximations for value functions and optimal strategies in the regime where these factors are running on both slow and fast timescales. However, the rigorous justification of the accuracy of these approximations has been limited to power utilities and a single factor. In this paper, we provide an accurate analysis for cases with general utility functions and two timescale factors by constructing sub- and super-solutions to the fully nonlinear problem so that their difference is at the desired level of accuracy. This approach will be valuable in various related stochastic control problems.

Full work available at URL: https://arxiv.org/abs/2106.11510

Recommendations

• Portfolio optimization and stochastic volatility asymptotics
• Multiscale asymptotic analysis for portfolio optimization under stochastic environment
• Optimal Strategies for Risk-Sensitive Portfolio Optimization Problems for General Factor Models
• Asymptotic analysis for portfolio optimization problem under two-factor Heston's stochastic volatility model
• Asymptotic optimal strategy for portfolio optimization in a slowly varying stochastic environment

zbMATH Keywords

portfolio optimizationstochastic volatilityutility maximizationsubsolutionsupersolutionrigorous asymptotics

Mathematics Subject Classification ID

Portfolio theory (91G10) Asymptotic expansions of solutions to PDEs (35C20) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

Cites Work

• Optimum consumption and portfolio rules in a continuous-time model
• Multiscale stochastic volatility for equity, interest rate, and credit derivatives.
• Portfolio Selection with Transaction Costs
• Optimal investment
• Optimal investment with transaction costs and stochastic volatility. II: Finite horizon
• Portfolio Choice with Transaction Costs: A User’s Guide
• A solution approach to valuation with unhedgeable risks
• Portfolio optimization and stochastic volatility asymptotics
• Multiscale asymptotic analysis for portfolio optimization under stochastic environment
• Asymptotic optimal strategy for portfolio optimization in a slowly varying stochastic environment
• Construction of a class of forward performance processes in stochastic factor models, and an extension of Widder's theorem

Cited In (1)

• Multiscale asymptotic analysis for portfolio optimization under stochastic environment

This page was built for publication: Sub- and supersolution approach to accuracy analysis of portfolio optimization asymptotics in multiscale stochastic factor markets

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5029934)