Semi-analytical solutions for dynamic portfolio choice in jump-diffusion models and the optimal bond-stock mix

Yi Hong and Xing Jin

European Journal of Operational Research, 2018, vol. 265, issue 1, 389-398

Abstract: This paper studies the optimal portfolio selection problem in jump-diffusion models where an investor has a HARA utility function, and there are potentially a large number of assets and state variables. More specifically, we incorporate jumps into both stock returns and state variables, and then derive semi-analytical solutions for the optimal portfolio policy up to solving a set of ordinary differential equations to greatly facilitate economic insights and empirical applications of jump-diffusion models. To examine the effect of jump risk on investors’ behavior, we apply our results to the bond-stock mix problem and particularly revisit the bond/stock ratio puzzle in jump-diffusion models. Our results cast new light on this puzzle that unlike pure-diffusion models, it cannot be rationalized by the hedging demand assumption due to the presence of jumps in stock returns.

Keywords: Finance; Optimal portfolio selection; Jump-diffusion models; HARA utility functions; Bond-stock mix (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221717307221
Full text for ScienceDirect subscribers only

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:eee:ejores:v:265:y:2018:i:1:p:389-398

DOI: 10.1016/j.ejor.2017.08.010

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().