Portfolio optimization for pension plans under hybrid stochastic and local volatility

Sung Jin Yang; Jeong Hoon Kim; Min Ku Lee

doi:10.1007/s10492-015-0091-9

Portfolio optimization for pension plans under hybrid stochastic and local volatility

Sung Jin Yang, Jeong Hoon Kim, Min Ku Lee

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

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 language	English
Pages (from-to)	197-215
Number of pages	19
Journal	Applications of Mathematics
Volume	60
Issue number	2
DOIs	https://doi.org/10.1007/s10492-015-0091-9
Publication status	Published - 2015 Apr

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© 2015, Institute of Mathematics of the Academy of Sciences of the Czech Republic, Praha, Czech Republic.

All Science Journal Classification (ASJC) codes

Applied Mathematics

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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{\textquoteright}s strategy in terms of the stochastic volatility and the elasticity of variance.",

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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.

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Portfolio optimization for pension plans under hybrid stochastic and local volatility

Abstract

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