LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH

DOI10.1142/S0219024917500376MaRDI QIDQ5367499zbMATH OpenFDO

Authors Tim Leung, Hyungbin Park

Publication date 13 October 2017

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1612.01013

zbMATH Keywords

expected utilityleveraged ETFlong-term growth rate

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: This paper studies the long-term growth rate of expected utility from holding a leveraged exchanged-traded fund (LETF), which is a constant proportion portfolio of the reference asset. Working with the power utility function, we develop an analytical approach that employs martingale extraction and involves finding the eigenpair associated with the infinitesimal generator of a Markovian time-homogeneous diffusion. We derive explicitly the long-term growth rates under a number of models for the reference asset, including the geometric Brownian motion model, GARCH model, inverse GARCH model, extended CIR model, 3/2 model, quadratic model, as well as the Heston and 3/2 stochastic volatility models. We also investigate the impact of stochastic interest rate such as the Vasicek model and the inverse GARCH short rate model. We determine the optimal leverage ratio for the long-term investor and examine the effects of model parameters.

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Cited in

(4)

• Convergence rates of large-time sensitivities with the Hansen-Scheinkman decomposition
• The dynamics of leveraged ETFs returns: a panel data study
• Robust long-term growth rate of expected utility for leveraged ETFs
• A study of leveraged ETF based on geometric return

Describes a project that uses

Uses Software

• Mathematica

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