Portfolio Optimization in Fractional and Rough Heston Models

Nicole B\"auerle and Sascha Desmettre

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Abstract: We consider a fractional version of the Heston volatility model which is inspired by [16]. Within this model we treat portfolio optimization problems for power utility functions. Using a suitable representation of the fractional part, followed by a reasonable approximation we show that it is possible to cast the problem into the classical stochastic control framework. This approach is generic for fractional processes. We derive explicit solutions and obtain as a by-product the Laplace transform of the integrated volatility. In order to get rid of some undesirable features we introduce a new model for the rough path scenario which is based on the Marchaud fractional derivative. We provide a numerical study to underline our results.

Date: 2018-09, Revised 2019-05
New Economics Papers: this item is included in nep-upt
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