A class of portfolio optimization solvable problems

Cheng, Yuyang; Escobar‐Anel, Marcos

doi:10.1016/j.frl.2022.103373

Finance Research Letters

2023

DOI: 10.1016/j.frl.2022.103373

|View full text |Cite

A class of portfolio optimization solvable problems

Yuyang Cheng

Marcos Escobar‐Anel

Help me understand this report

Search citation statements

Order By: Relevance

Paper Sections

Select...

Citation Types

Supporting

Mentioning

Contrasting

Year Published

2023

Publication Types

Select...

Article1

Relationship

Self Cite0

Independent1

Authors

Journals

Cited by 1 publication

References 17 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

The SEV-SV Model—Applications in Portfolio Optimization

Escobar‐Anel

Fan

2023

Risks

View full text Add to dashboard Cite

This paper introduces and studies a new family of diffusion models for stock prices with applications in portfolio optimization. The diffusion model combines (stochastic) elasticity of volatility (EV) and stochastic volatility (SV) to create the SEV-SV model. In particular, we focus on the SEV component, which is driven by an Ornstein–Uhlenbeck process via two separate functional choices, while the SV component features the state-of-the-art 4/2 model. We study an investment problem within expected utility theory (EUT) for incomplete markets, producing closed-form representations for the optimal strategy, value function, and optimal wealth process for two different cases of prices of risk on the stock. We find that when EV reverts to a GBM model, the volatility and speed of reversion of the EV have a strong impact on optimal allocations, and more aggressive (bull markets) or cautious (bear markets) strategies are hence recommended. For a model when EV reverts away from GBM, only the mean reverting level of the EV plays a role. Moreover, the presence of SV leads mainly to more conservative investment decisions for short horizons. Overall, the SEV plays a more significant role than SV in the optimal allocation.

show abstract

The SEV-SV Model—Applications in Portfolio Optimization

Escobar‐Anel

Fan

2023

Risks

View full text Add to dashboard Cite

show abstract

scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.

Contact Info

customersupport@researchsolutions.com

10624 S. Eastern Ave., Ste. A-614

Henderson, NV 89052, USA

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Blog Terms and Conditions API Terms Privacy Policy Contact Cookie Preferences Do Not Sell or Share My Personal Information

Made with 💙 for researchers

Part of the Research Solutions Family.

A class of portfolio optimization solvable problems

Cited by 1 publication

References 17 publications

The SEV-SV Model—Applications in Portfolio Optimization

The SEV-SV Model—Applications in Portfolio Optimization

Contact Info

Product

Resources

About