Sub- and Super-solution Approach to Accuracy Analysis of Portfolio Optimization Asymptotics in Multiscale Stochastic Factor Market

Jean-Pierre Fouque, Ruimeng Hu and Ronnie Sircar

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Abstract: The problem of portfolio optimization when stochastic factors drive returns and volatilities has been studied in previous works by the authors. In particular, they proposed asymptotic approximations for value functions and optimal strategies in the regime where these factors are running on both slow and fast timescales. However, the rigorous justification of the accuracy of these approximations has been limited to power utilities and a single factor. In this paper, we provide an accurate analysis for cases with general utility functions and two timescale factors by constructing sub- and super-solutions to the fully nonlinear problem so that their difference is at the desired level of accuracy. This approach will be valuable in various related stochastic control problems.

Date: 2021-06, Revised 2021-10
New Economics Papers: this item is included in nep-ore and nep-upt
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