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

All Science Journal Classification (ASJC) codes

  • Applied Mathematics

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