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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 ISSN 0893-9454.
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Official URL: http://dx.doi.org/10.1093/rfs/hhs083
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 | ||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Review of Financial Studies | ||||
Publisher: | Oxford University Press | ||||
ISSN: | 0893-9454 | ||||
Official Date: | September 2012 | ||||
Dates: |
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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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