Optimal portfolio choices under the SVCEV model with exponential utility

In this paper, we consider optimal portfolio choices under a hybrid model of stochastic volatility and constant elasticity of variance (CEV). The Hamilton-Jacobi-Bellman (HJB) equation is derived for the exponential (CARA) utility. Applying an asymptotic method, we obtain an explicit solution for th...

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Bibliographic Details
Main Authors: Peng, Beidi, Cao, Jiling, Zhang, Wenjun
Format: Conference Proceeding
Language:English
Subjects:
Asymptotic methods
Sensitivity analysis
Online Access:Get full text
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Summary:In this paper, we consider optimal portfolio choices under a hybrid model of stochastic volatility and constant elasticity of variance (CEV). The Hamilton-Jacobi-Bellman (HJB) equation is derived for the exponential (CARA) utility. Applying an asymptotic method, we obtain an explicit solution for the leading optimal strategy and the first correction term perturbed by an OU process. The leading term coincides with the classical Merton’s strategy. Furthermore, we also get a practical asymptotic optimal strategy by considering the fact that the ornstein-uhlenbeck (OU) process is not observable. Finally, we conduct a sensitivity analysis on the leading optimal strategy and the first correction term against the excess return.
ISSN:0094-243X
1551-7616
DOI:10.1063/5.0075535