IDEAS home Printed from https://ideas.repec.org/a/gam/jmathe/v12y2024i3p440-d1329551.html
   My bibliography  Save this article

Robust Portfolio Choice under the Modified Constant Elasticity of Variance

Author

Listed:
  • Wei Li Fan

    (Department of Statistical and Actuarial Sciences, University of Western Ontario, London, ON N6A 5B7, Canada
    These authors contributed equally to this work.)

  • Marcos Escobar Anel

    (Department of Statistical and Actuarial Sciences, University of Western Ontario, London, ON N6A 5B7, Canada
    These authors contributed equally to this work.)

Abstract

This study investigates ambiguity aversion within the framework of a utility-maximizing investor under a modified constant-elasticity-of-volatility (M-CEV) model for the underlying asset. We derive closed-form solutions of a non-affine type for the optimal allocation and value function via a Cauchy problem. This work generalizes previous results in non-ambiguous settings by extending existing work to Hyperbolic Absolute Risk Aversion utility (HARA), correcting some typos in the literature for Constant Relative Risk Aversion utility (CRRA). Helpful details and derivations are also included in the manuscript.

Suggested Citation

  • Wei Li Fan & Marcos Escobar Anel, 2024. "Robust Portfolio Choice under the Modified Constant Elasticity of Variance," Mathematics, MDPI, vol. 12(3), pages 1-31, January.
    • Handle: RePEc:gam:jmathe:v:12:y:2024:i:3:p:440-:d:1329551
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7390/12/3/440/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7390/12/3/440/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gao, Jianwei, 2009. "Optimal portfolios for DC pension plans under a CEV model," Insurance: Mathematics and Economics, Elsevier, vol. 44(3), pages 479-490, June.
    2. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010. "Ambiguity in Asset Markets: Theory and Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
    3. Liu, Jun & Pan, Jun, 2003. "Dynamic derivative strategies," Journal of Financial Economics, Elsevier, vol. 69(3), pages 401-430, September.
    4. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
    5. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    6. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    7. Marcos Escobar-Anel & Maximilian Keller & Rudi Zagst & Egidio D'Amato, 2022. "Optimal HARA Investments with Terminal VaR Constraints," Advances in Operations Research, Hindawi, vol. 2022, pages 1-20, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zeng, Yan & Li, Danping & Chen, Zheng & Yang, Zhou, 2018. "Ambiguity aversion and optimal derivative-based pension investment with stochastic income and volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 70-103.
    2. Escobar, Marcos & Ferrando, Sebastian & Rubtsov, Alexey, 2015. "Robust portfolio choice with derivative trading under stochastic volatility," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 142-157.
    3. Wang, Pei & Li, Zhongfei, 2018. "Robust optimal investment strategy for an AAM of DC pension plans with stochastic interest rate and stochastic volatility," Insurance: Mathematics and Economics, Elsevier, vol. 80(C), pages 67-83.
    4. Wang, Ning & Zhang, Yumo, 2024. "Robust asset-liability management games for n players under multivariate stochastic covariance models," Insurance: Mathematics and Economics, Elsevier, vol. 117(C), pages 67-98.
    5. Qian Lin & Xianming Sun & Chao Zhou, 2019. "Horizon-unbiased Investment with Ambiguity," Papers 1904.09379, arXiv.org.
    6. Zheng, Xiaoxiao & Zhou, Jieming & Sun, Zhongyang, 2016. "Robust optimal portfolio and proportional reinsurance for an insurer under a CEV model," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 77-87.
    7. Len Patrick Dominic M. Garces & Yang Shen, 2024. "Robust optimal investment and consumption strategies with portfolio constraints and stochastic environment," Papers 2407.02831, arXiv.org.
    8. Escobar, Marcos & Ferrando, Sebastian & Rubtsov, Alexey, 2018. "Dynamic derivative strategies with stochastic interest rates and model uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 49-71.
    9. Lin, Qian & Sun, Xianming & Zhou, Chao, 2020. "Horizon-unbiased investment with ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    10. Marcos Escobar-Anel & Max Speck & Rudi Zagst, 2024. "Bayesian Learning in an Affine GARCH Model with Application to Portfolio Optimization," Mathematics, MDPI, vol. 12(11), pages 1-27, May.
    11. Wang, Ning & Zhang, Yumo, 2023. "Robust optimal asset-liability management with mispricing and stochastic factor market dynamics," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 251-273.
    12. Gonçalo Faria & João Correia-da-Silva, 2016. "Is stochastic volatility relevant for dynamic portfolio choice under ambiguity?," The European Journal of Finance, Taylor & Francis Journals, vol. 22(7), pages 601-626, May.
    13. Cheng, Yuyang & Escobar-Anel, Marcos, 2023. "A class of portfolio optimization solvable problems," Finance Research Letters, Elsevier, vol. 52(C).
    14. Phelim Boyle & Lorenzo Garlappi & Raman Uppal & Tan Wang, 2012. "Keynes Meets Markowitz: The Trade-Off Between Familiarity and Diversification," Management Science, INFORMS, vol. 58(2), pages 253-272, February.
    15. Wei, Pengyu & Yang, Charles & Zhuang, Yi, 2023. "Robust consumption and portfolio choice with derivatives trading," European Journal of Operational Research, Elsevier, vol. 304(2), pages 832-850.
    16. Horváth, Ferenc, 2017. "Essays on robust asset pricing," Other publications TiSEM e54d7b33-1f27-4b0e-9f84-f, Tilburg University, School of Economics and Management.
    17. Yuyang Cheng & Marcos Escobar-Anel, 2023. "Optimal Consumption and Robust Portfolio Choice for the 3/2 and 4/2 Stochastic Volatility Models," Mathematics, MDPI, vol. 11(18), pages 1-28, September.
    18. Frank Bosserhoff & An Chen & Nils Sorensen & Mitja Stadje, 2021. "On the Investment Strategies in Occupational Pension Plans," Papers 2104.08956, arXiv.org.
    19. Claus Munk & Alexey Rubtsov, 2014. "Portfolio management with stochastic interest rates and inflation ambiguity," Annals of Finance, Springer, vol. 10(3), pages 419-455, August.
    20. Branger, Nicole & Larsen, Linda Sandris, 2013. "Robust portfolio choice with uncertainty about jump and diffusion risk," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5036-5047.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jmathe:v:12:y:2024:i:3:p:440-:d:1329551. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.