Sharpe Ratio Maximization and Expected Utility when Asset Prices have Jumps

Morten Christensen and Eckhard Platen ()
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Morten Christensen: University of Southern Denmark

No 170, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We analyze portfolio strategies which are locally optimal, meaning that they maximize the Sharpe ratio in a general continuous time jump-diffusion framework. These portfolios are characterized explicitly and compared to utility based strategies. In the presence of jumps, maximizing the Sharpe ratio is shown to be generally inconsistent with maximizing expected utility, but this is shown to depend strongly on market completeness and whether event risk is priced.

Pages: 27 pages
Date: 2005-11-01
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-rmg and nep-upt
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Published as: Christensen, M. and Platen, E., 2007, "Sharpe Ratio Maximization and Expected Utility when Asset Prices have Jumps", International Journal of Theoretical and Applied Finance, 10(8), 1339-1364.

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https://www.uts.edu.au/sites/default/files/qfr-archive-02/QFR-rp170.pdf (application/pdf)

Related works:
Journal Article: SHARPE RATIO MAXIMIZATION AND EXPECTED UTILITY WHEN ASSET PRICES HAVE JUMPS (2007)
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