Optimal investment under multi-factor stochastic volatility

Marcos Escobar Anel (), Sebastian Ferrando and Alexey Rubtsov

Quantitative Finance, 2017, vol. 17, issue 2, 241-260

Abstract: We consider a model for multivariate intertemporal portfolio choice in complete and incomplete markets with a multi-factor stochastic covariance matrix of asset returns. The optimal investment strategies are derived in closed form. We estimate the model parameters and illustrate the optimal investment based on two stock indices: S&P500 and DAX. It is also shown that the model satisfies several stylized facts well known in the literature. We analyse the welfare losses due to suboptimal investment strategies and we find that investors who invest myopically, ignore derivative assets, model volatility by one factor and ignore stochastic covariance between asset returns can incur significant welfare losses.

Date: 2017
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DOI: 10.1080/14697688.2016.1202440

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