Dynamic Derivative Strategies
Jun Liu and
No 4334-02, Working papers from Massachusetts Institute of Technology (MIT), Sloan School of Management
This paper studies the optimal investment strategy of an investor who can access not only the bond and the stock markets, but also the derivatives market. We consider the investment situation where, in addition to the usual diffusive price shocks, the stock market experiences sudden price jumps and stochastic volatility. The dynamic portfolio problem involving derivatives is solved in closed-form. Our results show that derivatives are important in providing access to the risk and return tradeoffs associated with the volatility and jump risks. Moreover, as a vehicle to the volatility risk, derivatives are used by non-myopic investors to exploit the time-varying opportunity set; and as a vehicle to the jump risk, derivatives are used by investors to disentangle their simultaneous exposure to the diffusive and jump risks in the stock market. In addition, derivatives investing also affects investors' stock position because of the interaction between the two markets. Finally, calibrating our model to the S&P 500 index and options markets, we find sizable portfolio improvement for taking advantage of derivatives.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 429 429 (http://hdl.handle.net/1721.1/3548 [302 Found]--> https://dspace.mit.edu/handle/1721.1/3548)
Journal Article: Dynamic derivative strategies (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:mit:sloanp:3548
Ordering information: This working paper can be ordered from
MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Access Statistics for this paper
More papers in Working papers from Massachusetts Institute of Technology (MIT), Sloan School of Management MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().