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This paper studies a robust portfolio optimization problem under the multi-factor volatility model introduced by Christoffersen et al. (2009). The optimal strategy is derived analytically under the worst-case scenario with or without derivative trading. To illustrate the effects of ambiguity, we compare our optimal robust strategy with some strategies that ignore the information of uncertainty, and provide the corresponding welfare analysis. The effects of derivative trading to the optimal portfolio selection are also discussed by considering alternative strategies. Our study is further extended to the cases with jump risks in asset price and correlated volatility factors, respectively. Numerical experiments are provided to demonstrate the behavior of the optimal portfolio and utility loss.
The problem of portfolio optimization when stochastic factors drive returns and volatilities has been studied in previous works by the authors. In particular, they proposed asymptotic approximations for value functions and optimal strategies in the r
In the present work, we propose a new multifactor stochastic volatility model in which slow factor of volatility is approximated by a parabolic arc. We retain ourselves to the perturbation technique to obtain approximate expression for European optio
Fractional stochastic volatility models have been widely used to capture the non-Markovian structure revealed from financial time series of realized volatility. On the other hand, empirical studies have identified scales in stock price volatility: bo
The problem of portfolio allocation in the context of stocks evolving in random environments, that is with volatility and returns depending on random factors, has attracted a lot of attention. The problem of maximizing a power utility at a terminal t
In this paper we show how to implement in a simple way some complex real-life constraints on the portfolio optimization problem, so that it becomes amenable to quantum optimization algorithms. Specifically, first we explain how to obtain the best inv