The optimal investment problem in stochastic and local volatility models

Vladimir Piterbarg

Journal of Investment Strategies

Abstract: We revisit the classical Merton optimal allocation ;problem and show that significant corrections to the Merton ratio arise from the hard-to-observe behavior of the volatility process around zero. Having regularized this behavior, we show that the adjustment to the “myopic†Merton ratio can be largely deduced from observed option prices, which paves the way for a practical ;approach to more efficient ;asset allocation.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:6146046

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