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Portfolio Choice with Stochastic Investment Opportunities: a User's Guide

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  • Ren Liu
  • Johannes Muhle-Karbe

Abstract

This survey reviews portfolio choice in settings where investment opportunities are stochastic due to, e.g., stochastic volatility or return predictability. It is explained how to heuristically compute candidate optimal portfolios using tools from stochastic control, and how to rigorously verify their optimality by means of convex duality. Special emphasis is placed on long-horizon asymptotics, that lead to particularly tractable results.

Suggested Citation

  • Ren Liu & Johannes Muhle-Karbe, 2013. "Portfolio Choice with Stochastic Investment Opportunities: a User's Guide," Papers 1311.1715, arXiv.org.
    • Handle: RePEc:arx:papers:1311.1715
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    File URL: http://arxiv.org/pdf/1311.1715
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    References listed on IDEAS

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    1. Imen Ben Tahar & Nizar Touzi & Mete H. Soner, 2010. "Merton Problem with Taxes: Characterization, computation and Approximation," Post-Print hal-00703102, HAL.
    2. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, February.
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    Cited by:

    1. Huyen Pham, 2014. "Long time asymptotics for optimal investment," Working Papers hal-01058657, HAL.
    2. René Carmona & Kevin Webster, 2019. "The self-financing equation in limit order book markets," Finance and Stochastics, Springer, vol. 23(3), pages 729-759, July.
    3. 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.

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