Merton's portfolio problem under Volterra Heston model
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AbstractThis paper investigates Merton’s portfolio problem in a rough stochastic environment described by Volterra Heston model. The model has a non-Markovian and non-semimartingale structure. By considering an auxiliary random process, we solve the portfolio optimization problem with the martingale optimality principle. Optimal strategies for power and exponential utilities are derived in semi-closed form solutions depending on the respective Riccati-Volterra equations. We numerically examine the relationship between investment demand and volatility roughness.
Acceptance Date09/05/2020
All Author(s) ListBingyan Han, Hoi Ying Wong
Journal nameFinance Research Letters
Article number101580
LanguagesEnglish-United States
KeywordsOptimal portfolio, Rough volatility, Volterra Heston model, Riccati-Volterra equations

Last updated on 2020-23-10 at 00:06