Merton’s portfolio problem under Volterra Heston model

Bingyan Han and Hoi Ying Wong

Finance Research Letters, 2021, vol. 39, issue C

Abstract: This paper investigates Merton’s portfolio problem in a rough stochastic environment described by Volterra Heston model. The model has a non-Markovian and non-semimartingale structure. By considering an auxiliary random process, we solve the portfolio optimization problem with the martingale optimality principle. Optimal strategies for power and exponential utilities are derived in semi-closed form solutions depending on the respective Riccati-Volterra equations. We numerically examine the relationship between investment demand and volatility roughness.

Keywords: Optimal portfolio; Rough volatility; Volterra Heston model; Riccati-Volterra equations (search for similar items in EconPapers)
JEL-codes: C61 D52 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319312917

DOI: 10.1016/j.frl.2020.101580

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