Robust portfolio optimization with multi-factor stochastic volatility

DOI10.1007/S10957-020-01687-WzbMATH Open1466.91300arXiv1910.06872OpenAlexW3032985075MaRDI QIDQ779874FDOQ779874

Authors: Ben-Zhang Yang, Xiaoping Lu, Guiyuan Ma, Song-Ping Zhu 

Publication date: 14 July 2020

Published in: Journal of Optimization Theory and Applications (Search for Journal in Brave)

Abstract: This paper studies a robust portfolio optimization problem under the multi-factor volatility model introduced by Christoffersen et al. (2009). The optimal strategy is derived analytically under the worst-case scenario with or without derivative trading. To illustrate the effects of ambiguity, we compare our optimal robust strategy with some strategies that ignore the information of uncertainty, and provide the corresponding welfare analysis. The effects of derivative trading to the optimal portfolio selection are also discussed by considering alternative strategies. Our study is further extended to the cases with jump risks in asset price and correlated volatility factors, respectively. Numerical experiments are provided to demonstrate the behavior of the optimal portfolio and utility loss.

Full work available at URL: https://arxiv.org/abs/1910.06872

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zbMATH Keywords

robust portfolio selectionambiguity effectjump risksmulti-factor volatilitynon-affine stochastic volatility

Mathematics Subject Classification ID

Portfolio theory (91G10) Optimal stochastic control (93E20)

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Cited In (9)

• Portfolio optimization and a factor model in a stochastic volatility market
• Robust equilibrium strategies for time-inconsistent stochastic optimal control problems with applications
• Equilibrium strategy for mean-variance-utility portfolio selection under Heston's SV model
• Continuous time mean–variance–utility portfolio problem and its equilibrium strategy
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• Robust scenario optimization based on downside-risk measure for multi-period portfolio selection
• Distributionally robust portfolio optimization with linearized STARR performance measure
• Valuation of European crude oil options with co-jump diffusions and stochastic interest rate

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