When do jumps matter for portfolio optimization?

Marius Ascheberg, Nicole Branger and Holger Kraft

No 16, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We consider the continuous-time portfolio optimization problem of an investor with constant relative risk aversion who maximizes expected utility of terminal wealth. The risky asset follows a jump-diffusion model with a diffusion state variable. We propose an approximation method that replaces the jumps by a diffusion and solve the resulting problem analytically. Furthermore, we provide explicit bounds on the true optimal strategy and the relative wealth equivalent loss that do not rely on results from the true model. We apply our method to a calibrated affine model and find that relative wealth equivalent losses are below 1.16% if the jump size is stochastic and below 1% if the jump size is constant and ... 5. We perform robustness checks for various levels of risk-aversion, expected jump size, and jump intensity.

Keywords: Optimal investment; jumps; stochastic volatility; welfare loss (search for similar items in EconPapers)
JEL-codes: C63 G11 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/88724/1/775702579.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:16

DOI: 10.2139/ssrn.2259630

Access Statistics for this paper

More papers in SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().