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Portfolio optimization for pension plans under hybrid stochastic and local volatility

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Abstract

Based upon an observation that it is too restrictive to assume a definite correlation of the underlying asset price and its volatility, we use a hybrid model of the constant elasticity of variance and stochastic volatility to study a portfolio optimization problem for pension plans. By using asymptotic analysis, we derive a correction to the optimal strategy for the constant elasticity of variance model and subsequently the fine structure of the corrected optimal strategy is revealed. The result is a generalization of Merton’s strategy in terms of the stochastic volatility and the elasticity of variance.

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Authors and Affiliations

  1. Department of Mathematics, Yonsei University, Seoul, 120-749, Korea

    Sung-Jin Yang & Jeong-Hoon Kim

  2. Department of Mathematics, Ewha Womans University, Seoul, 120-750, Korea

    Min-Ku Lee

Authors
  1. Sung-Jin Yang
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  2. Jeong-Hoon Kim
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  3. Min-Ku Lee
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Correspondence to Jeong-Hoon Kim.

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Yang, SJ., Kim, JH. & Lee, MK. Portfolio optimization for pension plans under hybrid stochastic and local volatility. Appl Math 60, 197–215 (2015). https://doi.org/10.1007/s10492-015-0091-9

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  • DOI: https://doi.org/10.1007/s10492-015-0091-9

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