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Sub- and Super-solution Approach to Accuracy Analysis of Portfolio Optimization Asymptotics in Multiscale Stochastic Factor Market

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  • Jean-Pierre Fouque
  • Ruimeng Hu
  • Ronnie Sircar

Abstract

The problem of portfolio optimization when stochastic factors drive returns and volatilities has been studied in previous works by the authors. In particular, they proposed asymptotic approximations for value functions and optimal strategies in the regime where these factors are running on both slow and fast timescales. However, the rigorous justification of the accuracy of these approximations has been limited to power utilities and a single factor. In this paper, we provide an accurate analysis for cases with general utility functions and two timescale factors by constructing sub- and super-solutions to the fully nonlinear problem so that their difference is at the desired level of accuracy. This approach will be valuable in various related stochastic control problems.

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  • Jean-Pierre Fouque & Ruimeng Hu & Ronnie Sircar, 2021. "Sub- and Super-solution Approach to Accuracy Analysis of Portfolio Optimization Asymptotics in Multiscale Stochastic Factor Market," Papers 2106.11510, arXiv.org, revised Oct 2021.
    • Handle: RePEc:arx:papers:2106.11510
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    References listed on IDEAS

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    1. Fouque,Jean-Pierre & Papanicolaou,George & Sircar,Ronnie & Sølna,Knut, 2011. "Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives," Cambridge Books, Cambridge University Press, number 9780521843584.
    2. Thaleia Zariphopoulou, 2001. "A solution approach to valuation with unhedgeable risks," Finance and Stochastics, Springer, vol. 5(1), pages 61-82.
    3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    4. 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.
    5. Jean-Pierre Fouque & Sebastian Jaimungal & Yuri F. Saporito, 2021. "Optimal Trading with Signals and Stochastic Price Impact," Papers 2101.10053, arXiv.org, revised Aug 2023.
    6. M. H. A. Davis & A. R. Norman, 1990. "Portfolio Selection with Transaction Costs," Mathematics of Operations Research, INFORMS, vol. 15(4), pages 676-713, November.
    7. Levon Avanesyan & Mykhaylo Shkolnikov & Ronnie Sircar, 2020. "Construction of a class of forward performance processes in stochastic factor models, and an extension of Widder’s theorem," Finance and Stochastics, Springer, vol. 24(4), pages 981-1011, October.
    8. Jean-Pierre Fouque & Ronnie Sircar & Thaleia Zariphopoulou, 2017. "Portfolio Optimization And Stochastic Volatility Asymptotics," Mathematical Finance, Wiley Blackwell, vol. 27(3), pages 704-745, July.
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