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Decomposition of optimal portfolio weight in a jump-diffusion model and its applications

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Jin, Xing and Zhang, A. X. (2012) Decomposition of optimal portfolio weight in a jump-diffusion model and its applications. Review of Financial Studies, Vol.25 (No.9). pp. 2877-2919. doi:10.1093/rfs/hhs083

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Official URL: http://dx.doi.org/10.1093/rfs/hhs083

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Abstract

This article solves the portfolio choice problem in a multi-asset jump-diffusion model. We decompose the optimal portfolio weight into components that correspond to a collection of fictitious economies, one of which is a standard diffusion economy, and the others of which are pure-jump economies. We derive a semi-closed-form solution for the optimal portfolio weight, and investigate its properties with or without ambiguity aversion. We find that an investor may not reduce her investment in risky assets when facing more frequent jumps, as suggested by a single-asset jump-diffusion model. Moreover, an investor who is extremely cautious about her estimates of higher moments of asset returns may still hold risky assets, contrary to the prediction of a pure-diffusion model with ambiguity aversion to the first moment.

Item Type: Journal Article
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Review of Financial Studies
Publisher: Oxford University Press
ISSN: 0893-9454
Official Date: September 2012
Dates:
DateEvent
September 2012Published
Volume: Vol.25
Number: No.9
Page Range: pp. 2877-2919
DOI: 10.1093/rfs/hhs083
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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