Multiscale Asymptotic Analysis for Portfolio Optimization under Stochastic Environment

Jean-Pierre Fouque and Ruimeng Hu

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Abstract: Empirical studies indicate the presence of multi-scales in the volatility of underlying assets: a fast-scale on the order of days and a slow-scale on the order of months. In our previous works, we have studied the portfolio optimization problem in a Markovian setting under each single scale, the slow one in [Fouque and Hu, SIAM J. Control Optim., 55 (2017), 1990-2023], and the fast one in [Hu, Proceedings of IEEE CDC 2018, accepted]. This paper is dedicated to the analysis when the two scales coexist in a Markovian setting. We study the terminal wealth utility maximization problem when the volatility is driven by both fast- and slow-scale factors. We first propose a zeroth-order strategy, and rigorously establish the first order approximation of the associated problem value. This is done by analyzing the corresponding linear partial differential equation (PDE) via regular and singular perturbation techniques, as in the single-scale cases. Then, we show the asymptotic optimality of our proposed strategy within a specific family of admissible controls. Interestingly, we highlight that a pure PDE approach does not work in the multi-scale case and, instead, we use the so-called epsilon-martingale decomposition. This completes the analysis of portfolio optimization in both fast mean-reverting and slowly-varying Markovian stochastic environments.

Date: 2019-02, Revised 2019-09
New Economics Papers: this item is included in nep-upt
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