Portfolio choice with jumps: A closed-form solution

Portfolio choice with jumps: A closed-form solution

Yacine Aït-Sahalia, Julio Cacho-Diaz, and T. R. Hurd

Source: Ann. Appl. Probab. Volume 19, Number 2 (2009), 556-584.

Abstract

We analyze the consumption-portfolio selection problem of an investor facing both Brownian and jump risks. We bring new tools, in the form of orthogonal decompositions, to bear on the problem in order to determine the optimal portfolio in closed form. We show that the optimal policy is for the investor to focus on controlling his exposure to the jump risk, while exploiting differences in the Brownian risk of the asset returns that lies in the orthogonal space.

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Primary Subjects: 62P05, 60J75

Secondary Subjects: 93E20

Keywords: Optimal portfolio; jumps; Merton problem; factor models; closed-form solution

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Links and Identifiers

Permanent link to this document: http://projecteuclid.org/euclid.aoap/1241702241
Digital Object Identifier: doi:10.1214/08-AAP552
Mathematical Reviews number (MathSciNet): MR2521879
Zentralblatt MATH identifier: 1170.91364

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