NEWS‐GENERATED DEPENDENCE AND OPTIMAL PORTFOLIOS FOR n STOCKS IN A MARKET OF BARNDORFF‐NIELSEN AND SHEPHARD TYPE

Carl Lindberg

Mathematical Finance, 2006, vol. 16, issue 3, 549-568

Abstract: We consider Merton's portfolio optimization problem in a Black and Scholes market with non‐Gaussian stochastic volatility of Ornstein–Uhlenbeck type. The investor can trade in n stocks and a risk‐free bond. We assume that the dependence between stocks lies in that they partly share the Ornstein–Uhlenbeck processes of the volatility. We refer to these as news processes, and interpret this as that dependence between stocks lies solely in their reactions to the same news. The model is primarily intended for assets that are dependent, but not too dependent, such as stocks from different branches of industry. We show that this dependence generates covariance, and give statistical methods for both the fitting and verification of the model to data. Using dynamic programming, we derive and verify explicit trading strategies and Feynman–Kac representations of the value function for power utility.

Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.1111/j.1467-9965.2006.00282.x

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:bla:mathfi:v:16:y:2006:i:3:p:549-568

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().