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Semi-analytical solutions for dynamic portfolio choice in jump-diffusion models and the optimal bond-stock mix
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Hong, Yi and Jin, Xing (2018) Semi-analytical solutions for dynamic portfolio choice in jump-diffusion models and the optimal bond-stock mix. European Journal of Operational Research, 265 (1). pp. 389-398. doi:10.1016/j.ejor.2017.08.010
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Official URL: https://doi.org/10.1016/j.ejor.2017.08.010
Abstract
This paper studies the optimal portfolio selection problem in jump-diffusion models where an investor has a HARA utility function, and there are potentially a large number of assets and state variables. More specifically, we incorporate jumps into both stock returns and state variables, and then derive semi-analytical solutions for the optimal portfolio policy up to solving a set of ordinary differential equations to greatly facilitate economic insights and empirical applications of jump-diffusion models. To examine the effect of jump risk on investors’ behavior, we apply our results to the bond-stock mix problem and particularly revisit the bond/stock ratio puzzle in jump-diffusion models. Our results cast new light on this puzzle that unlike pure-diffusion models, it cannot be rationalized by the hedging demand assumption due to the presence of jumps in stock returns.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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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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| Library of Congress Subject Headings (LCSH): | Utility theory -- Mathematical models, Finance, Stockholders, Capitalists and financiers, Portfolio management, Investments, Securities | ||||||||
| Journal or Publication Title: | European Journal of Operational Research | ||||||||
| Publisher: | Elsevier Science BV | ||||||||
| ISSN: | 0377-2217 | ||||||||
| Official Date: | 16 February 2018 | ||||||||
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| Volume: | 265 | ||||||||
| Number: | 1 | ||||||||
| Page Range: | pp. 389-398 | ||||||||
| DOI: | 10.1016/j.ejor.2017.08.010 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
| RIOXX Funder/Project Grant: |
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