Numerical approximations of optimal portfolios in mispriced asymmetric Lévy markets

Winston Buckley, Hongwei Long and Mario Marshall

European Journal of Operational Research, 2016, vol. 252, issue 2, 676-686

Abstract: We present numerical approximations of optimal portfolios in mispriced Lévy markets under asymmetric information for informed and uninformed investors having logarithmic preference. We apply our numerical scheme to Kou (2002) jump-diffusion markets by deriving analytic formulas for the first two derivatives of the underlying portfolio objective function which depend only on the Lévy measure of the jump-generating process. Optimal portfolios are then simulated using the Box–Muller algorithm, Newton’s method and incomplete Beta functions. Convergence dynamics and trajectories of sample paths of optimal portfolios for both investors are presented at different levels of information asymmetry, mispricing, horizon, asymmetry in the Kou density, jump intensity, volatility, mean-reversion speed, and Sharpe ratios. We also apply the proposed Newton’s algorithm to compute optimal portfolios for investors in Variance Gamma markets via instantaneous centralized moments of returns.

Keywords: Finance; Asymmetric information; Mispricing; Optimal portfolio; Simulation (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:252:y:2016:i:2:p:676-686

DOI: 10.1016/j.ejor.2016.01.050

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