Application of Asymptotic Analysis of a High-Dimensional HJB Equation to Portfolio Optimization
In this paper, we consider a portfolio optimization problem where the wealth consists of investing into a risky asset with a slow mean-reverting volatility and receiving an uncontrollable stochastic cash flow under the exponential utility. The Hamilton–Jacobi–Bellman equation formulated from the opt...
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| Format: | Article |
| Language: | English |
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Hindawi Limited
2023-01-01
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| Series: | Journal of Mathematics |
| Online Access: | http://dx.doi.org/10.1155/2023/3399493 |
| Summary: | In this paper, we consider a portfolio optimization problem where the wealth consists of investing into a risky asset with a slow mean-reverting volatility and receiving an uncontrollable stochastic cash flow under the exponential utility. The Hamilton–Jacobi–Bellman equation formulated from the optimal investment problem is a high-dimensional nonlinear partial differential equation and difficult to find its analytical or numerical solutions. The paper provides a tractable asymptotic approach which treats the initial problem as a perturbation around the constant volatility problem. In this paper, we present a formal derivation of asymptotic approximation and prove the accuracy of the value function. Moreover, an illustrative example is provided to assess our approximate strategy and value function. |
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| ISSN: | 2314-4785 |