Analysis of optimal portfolio on finite and small time horizons for a stochastic volatility market model

Minglian Lin and Indranil SenGupta

Papers from arXiv.org

Abstract: In this paper, we consider the portfolio optimization problem in a financial market under a general utility function. Empirical results suggest that if a significant market fluctuation occurs, invested wealth tends to have a notable change from its current value. We consider an incomplete stochastic volatility market model, that is driven by both a Brownian motion and a jump process. At first, we obtain a closed-form formula for an approximation to the optimal portfolio in a small-time horizon. This is obtained by finding the associated Hamilton-Jacobi-Bellman integro-differential equation and then approximating the value function by constructing appropriate super-solution and sub-solution. It is shown that the true value function can be obtained by sandwiching the constructed super-solution and sub-solution. We also prove the accuracy of the approximation formulas. Finally, we provide a procedure for generating a close-to-optimal portfolio for a finite time horizon.

Date: 2021-04
New Economics Papers: this item is included in nep-ore, nep-rmg and nep-upt
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Citations: View citations in EconPapers (5)

Published in SIAM Journal on Financial Mathematics, 2021

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2104.06293

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