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A Proposal of Portfolio Choice for Infinitely Divisible Distributions of Assets Returns

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  • Kliber, Pawel

Abstract

In the paper we present a proposal of augmenting portfolio analysis for the infinitely divisible distributions of returns - so that the prices of assets can follow Lévy processes. In this article we propose a model in which asset prices follow multidimensional Lévy process and the interdependence between assets are described by covariance and multidimensional jump measure. Then we propose to choose the optimal portfolio based on three criteria: mean return, total variance of diffusion and a measure of jump risk. We also consider augmenting this multi-criteria choice setup for the costs of possible portfolio adjustments.

Suggested Citation

  • Kliber, Pawel, 2008. "A Proposal of Portfolio Choice for Infinitely Divisible Distributions of Assets Returns," MPRA Paper 22541, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:22541
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    File URL: https://mpra.ub.uni-muenchen.de/22541/1/MPRA_paper_22541.pdf
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    References listed on IDEAS

    as
    1. Eugene F. Fama, 1965. "Portfolio Analysis in a Stable Paretian Market," Management Science, INFORMS, vol. 11(3), pages 404-419, January.
    2. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    3. S. G. Kou, 2002. "A Jump-Diffusion Model for Option Pricing," Management Science, INFORMS, vol. 48(8), pages 1086-1101, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    portfolio analysis; Lévy processes; jump-diffusion models;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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