Portfolio Selection in Stochastic Environments
In this article, I explicitly solve dynamic portfolio choice problems, up to the solution of an ordinary differential equation (ODE), when the asset returns are quadratic and the agent has a constant relative risk aversion (CRRA) coefficient. My solution includes as special cases many existing explicit solutions of dynamic portfolio choice problems. I also present three applications that are not in the literature. Application 1 is the bond portfolio selection problem when bond returns are described by "quadratic term structure models." Application 2 is the stock portfolio selection problem when stock return volatility is stochastic as in Heston model. Application 3 is a bond and stock portfolio selection problem when the interest rate is stochastic and stock returns display stochastic volatility. (JEL G11) Copyright 2007, Oxford University Press.
Year of publication: |
2007
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Authors: | Liu, Jun |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 20.2007, 1, p. 1-39
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Publisher: |
Society for Financial Studies - SFS |
Saved in:
Online Resource
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