Robust portfolio optimization with multi-factor stochastic volatility

Ben-Zhang Yang, Xiaoping Lu, Guiyuan Ma and Song-Ping Zhu

Papers from arXiv.org

Abstract: This paper studies a robust portfolio optimization problem under the multi-factor volatility model introduced by Christoffersen et al. (2009). The optimal strategy is derived analytically under the worst-case scenario with or without derivative trading. To illustrate the effects of ambiguity, we compare our optimal robust strategy with some strategies that ignore the information of uncertainty, and provide the corresponding welfare analysis. The effects of derivative trading to the optimal portfolio selection are also discussed by considering alternative strategies. Our study is further extended to the cases with jump risks in asset price and correlated volatility factors, respectively. Numerical experiments are provided to demonstrate the behavior of the optimal portfolio and utility loss.

Date: 2019-10, Revised 2020-06
New Economics Papers: this item is included in nep-ore and nep-upt
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Citations: View citations in EconPapers (6)

Published in Journal of Optimization Theory and Applications, 2020

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1910.06872

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