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Robust Portfolio Choice under the Modified Constant Elasticity of Variance

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  • 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
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    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. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Liu, Jun & Pan, Jun, 2003. "Dynamic derivative strategies," Journal of Financial Economics, Elsevier, vol. 69(3), pages 401-430, September.
    7. 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.
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