Dynamic optimal mean-variance portfolio selection with a 3/2 stochastic volatility

Artikel

This paper considers a mean-variance portfolio selection problem when the stock price has a 3/2 stochastic volatility in a complete market. Specifically, we assume that the stock price and the volatility are perfectly negative correlated. By applying a backward stochastic differential equation (BSDE) approach, closed-form expressions for the statically optimal (time-inconsistent) strategy and the value function are derived. Due to time-inconsistency of mean variance criterion, a dynamic formulation of the problem is presented. We obtain the dynamically optimal (time-consistent) strategy explicitly, which is shown to keep the wealth process strictly below the target (expected terminal wealth) before the terminal time. Finally, we provide numerical studies to show the impact of main model parameters on the efficient frontier and illustrate the differences between the two optimal wealth processes.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Risks ; ISSN: 2227-9091 ; Volume: 9 ; Year: 2021 ; Issue: 4 ; Pages: 1-21 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft
• Subject: 3/2 stochastic volatility ; backward stochastic differential equation ; complete market ; dynamic optimality ; mean-variance portfolio selection

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Zhang, Yumo
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2021

Further information

• DOI: doi:10.3390/risks9040061
• Handle: http://hdl.handle.net/10419/258150
• Last update: 10.03.2025, 11:44 AM CET