Portfolio Selection in Stochastic Environments
In this article, I explicitly solve dynamic portfolio choice problems, up to the solution of an ordinary differential equation (ODE), when the asset returns are quadratic and the agent has a constant relative risk aversion (CRRA) coefficient. My solution includes as special cases many existing explicit solutions of dynamic portfolio choice problems. I also present three applications that are not in the literature. Application 1 is the bond portfolio selection problem when bond returns are described by “quadratic term structure models.” Application 2 is the stock portfolio selection problem when stock return volatility is stochastic as in Heston model. Application 3 is a bond and stock portfolio selection problem when the interest rate is stochastic and stock returns display stochastic volatility. (JEL G11)
- DOI
- 10.1093/rfs/hhl001
- Volume
- 20 (1)
- Pages
- 1-39
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref