Preprint2009

Portfolio choice with jumps: a closed-form solution

Yacine Aı̈t-Sahalia · Julio Cacho-Diaz · T. R. Hurd

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Stochastic processes and financial applications Financial Markets and Investment Strategies Risk and Portfolio Optimization

Abstract

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. 1. Introduction. Economists

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References

1971Optimum consumption and portfolio rules in a continuous-time model 1969Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case 2001Extreme Correlation of International Equity Markets 2002International Asset Allocation With Regime Shifts 2002Asymmetric correlations of equity portfolios 1970International Diversification of Investment Portfolios 1968Internationally Diversified Portfolios: Welfare Gains and Capital Flows 2003A New Approach to Measuring Financial Contagion

Cited by

2012Portfolio Selection: A Review 2017Robust Consumption and Portfolio Policies When Asset Prices Can Jump 2012Dynamic Hedging in Incomplete Markets: A Simple Solution 2012Decomposition of Optimal Portfolio Weight in a Jump-Diffusion Model and Its Applications 2010Solving Consumption and Portfolio Choice Problems: The State Variable Decomposition Method

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