Portfolio optimization for pension plans under hybrid stochastic and local volatility

Sung Jin Yang, Jeong-Hoon Kim, Min Ku Lee

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Based upon an observation that it is too restrictive to assume a definite correlation of the underlying asset price and its volatility, we use a hybrid model of the constant elasticity of variance and stochastic volatility to study a portfolio optimization problem for pension plans. By using asymptotic analysis, we derive a correction to the optimal strategy for the constant elasticity of variance model and subsequently the fine structure of the corrected optimal strategy is revealed. The result is a generalization of Merton’s strategy in terms of the stochastic volatility and the elasticity of variance.

Original languageEnglish
Pages (from-to)197-215
Number of pages19
JournalApplications of Mathematics
Volume60
Issue number2
DOIs
Publication statusPublished - 2015 Jan 1

Fingerprint

Pension plans
Portfolio Optimization
Volatility
Elasticity
Stochastic Volatility
Optimal Strategy
Asymptotic analysis
Fine Structure
Hybrid Model
Asymptotic Analysis
Optimization Problem

All Science Journal Classification (ASJC) codes

  • Applied Mathematics

Cite this

@article{4e15a3fd40c64047aa38b0ed3b34cefc,
title = "Portfolio optimization for pension plans under hybrid stochastic and local volatility",
abstract = "Based upon an observation that it is too restrictive to assume a definite correlation of the underlying asset price and its volatility, we use a hybrid model of the constant elasticity of variance and stochastic volatility to study a portfolio optimization problem for pension plans. By using asymptotic analysis, we derive a correction to the optimal strategy for the constant elasticity of variance model and subsequently the fine structure of the corrected optimal strategy is revealed. The result is a generalization of Merton’s strategy in terms of the stochastic volatility and the elasticity of variance.",
author = "Yang, {Sung Jin} and Jeong-Hoon Kim and Lee, {Min Ku}",
year = "2015",
month = "1",
day = "1",
doi = "10.1007/s10492-015-0091-9",
language = "English",
volume = "60",
pages = "197--215",
journal = "Applications of Mathematics",
issn = "0862-7940",
publisher = "Springer Netherlands",
number = "2",

}

Portfolio optimization for pension plans under hybrid stochastic and local volatility. / Yang, Sung Jin; Kim, Jeong-Hoon; Lee, Min Ku.

In: Applications of Mathematics, Vol. 60, No. 2, 01.01.2015, p. 197-215.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Portfolio optimization for pension plans under hybrid stochastic and local volatility

AU - Yang, Sung Jin

AU - Kim, Jeong-Hoon

AU - Lee, Min Ku

PY - 2015/1/1

Y1 - 2015/1/1

N2 - Based upon an observation that it is too restrictive to assume a definite correlation of the underlying asset price and its volatility, we use a hybrid model of the constant elasticity of variance and stochastic volatility to study a portfolio optimization problem for pension plans. By using asymptotic analysis, we derive a correction to the optimal strategy for the constant elasticity of variance model and subsequently the fine structure of the corrected optimal strategy is revealed. The result is a generalization of Merton’s strategy in terms of the stochastic volatility and the elasticity of variance.

AB - Based upon an observation that it is too restrictive to assume a definite correlation of the underlying asset price and its volatility, we use a hybrid model of the constant elasticity of variance and stochastic volatility to study a portfolio optimization problem for pension plans. By using asymptotic analysis, we derive a correction to the optimal strategy for the constant elasticity of variance model and subsequently the fine structure of the corrected optimal strategy is revealed. The result is a generalization of Merton’s strategy in terms of the stochastic volatility and the elasticity of variance.

UR - http://www.scopus.com/inward/record.url?scp=84924985299&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84924985299&partnerID=8YFLogxK

U2 - 10.1007/s10492-015-0091-9

DO - 10.1007/s10492-015-0091-9

M3 - Article

VL - 60

SP - 197

EP - 215

JO - Applications of Mathematics

JF - Applications of Mathematics

SN - 0862-7940

IS - 2

ER -