Portfolio choice with jumps: A closed-form solution

By Yacine Aït-Sahalia, Julio Cacho-Diaz, Thomas R. Hurd. 2009

120 citations recorded by the source corpus.

We analyze the consumption-portfolio selection problem of an investor facing both Brownian and jump risks. We bring new tools, in the form of orthogonal decompositions, to bear on the problem in order to determine the optimal portfolio in closed form. We show that the optimal policy is for the investor to focus on controlling his exposure to the jump risk, while exploiting differences in the Brownian risk of the asset returns that lies in the orthogonal space.

Subfields: Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/dcfb0d7d5f6760fbf4a657672ef24ae41bc1b57f

Citations in the corpus

• Modeling financial contagion using mutually exciting jump processes (2015, unknown): “Other papers have studied the impact of time-varying correlations and jumps on portfolio choice in a framework without mutual excitation: Ang and Bekaert (2002) consider a regime-switching model, consisting of one regime with low correlations and low volatilities and one regime with higher correlati”
• Quadratic Variance Swap Models (2016, unknown): “Chacko and Viceira (2005), Liu (2007), Aït-Sahalia, Cacho-Diaz, and Hurd (2009), Detemple and Rindisbacher (2010), among others, provide studies of optimal portfolios in partial equilibrium settings.”
• Roughing up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns (2014, unknown): “(2003a,b) as well as the more recent discussion in Aı̈t-Sahalia et al. (2009) related to portfolio allocation in the presence of jumps.”