Co-jumps and recursive preferences in portfolio choices

Immacolata Oliva and Ilaria Stefani ()
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Ilaria Stefani: Sapienza University of Rome

Annals of Finance, 2023, vol. 19, issue 3, No 1, 324 pages

Abstract: Abstract This paper investigates a multivariate, dynamic, continuous-time optimal consumption and portfolio allocation problem when the investor faces recursive utilities. The economy we are considering is described through both diffusion and discontinuities in the dynamics. We derive an approximated closed-form solution to optimal rules by exploiting standard dynamic programming techniques. Our findings are manifold. First, we obtain dynamic optimal weights, inversely proportional to volatility. Second, we show that both co-jumps frequency and intensity play a crucial role, as they considerably limit potential losses in the investors’ wealth. Third, we prove that jumps in precision reinforce the effect of jumps in price, further reducing optimal allocation. Finally, we highlight how co-jumps may influence investors’ choices regarding intertemporal consumption.

Keywords: Asset allocation; Consumption; Stochastic volatility; Wishart process; Co-jumps; Recursive preferences; Dynamic programming (search for similar items in EconPapers)
JEL-codes: C61 G11 G12 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10436-023-00425-2

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