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

DOI10.1137/21M1428625MaRDI QIDQ5029934zbMATH OpenOpenAlexFDO

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)

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

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)

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.

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Cites work

• A solution approach to valuation with unhedgeable risks
• Asymptotic optimal strategy for portfolio optimization in a slowly varying stochastic environment
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• Portfolio Selection with Transaction Costs
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Cited in

(1)

• Multiscale asymptotic analysis for portfolio optimization under stochastic environment

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