Optimal portfolios and Heston's stochastic volatility model: an explicit solution for power utility

Holger Kraft

Quantitative Finance, 2005, vol. 5, issue 3, 303-313

Abstract: Given an investor maximizing utility from terminal wealth with respect to a power utility function, we present a verification result for portfolio problems with stochastic volatility. Applying this result, we solve the portfolio problem for Heston's stochastic volatility model. We find that only under a specific condition on the model parameters does the problem possess a unique solution leading to a partial equilibrium. Finally, it is demonstrated that the results critically hinge upon the specification of the market price of risk. We conclude that, in applications, one has to be very careful when exogenously specifying the form of the market price of risk.

Keywords: Optimal portfolios; Stochastic volatility; Heston model (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (69)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/14697680500149503 (text/html)
Access to full text is restricted to subscribers.

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:taf:quantf:v:5:y:2005:i:3:p:303-313

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697680500149503

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().