Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
9953040 | Journal of Economic Dynamics and Control | 2018 | 25 Pages |
Abstract
We study a continuous time optimal portfolio allocation problem with volatility and co-jump risk, allowing prices, variances and covariances to jump simultaneously. Differently from the traditional approach, we deviate from affine models by specifying a flexible Wishart jump-diffusion for the co-precision (the inverse of the covariance matrix). The optimal portfolio weights that solve the dynamic programming problem are genuinely dynamic and proportional to the instantaneous co-precision, reconciling optimal dynamic allocation with the static Markowitz-type economic intuition. An application to the optimal allocation problem across hedge fund investment styles illustrates the importance of having jumps in volatility associated with jumps in price.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
I. Oliva, R. Renò,