Optimal Trading with Predictable Return and Stochastic Volatility

Download or read book Optimal Trading with Predictable Return and Stochastic Volatility written by Patrick Chan and published by . This book was released on 2015 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider a class of dynamic portfolio optimization problems that allow for models of return predictability, transaction costs, and stochastic volatility. Determining the dynamic optimal portfolio in this general setting is almost always intractable. We propose a multiscale asymptotic expansion when the volatility process is characterized by its time scales of fluctuation. The analysis of the nonlinear Hamilton- Jacobi-Bellman PDE is a singular perturbation problem when volatility is fast mean-reverting; and it is a regular perturbation when the volatility is slowly varying. These analyses can be combined for multifactor multiscale stochastic volatility model. We present formal derivations of asymptotic approximations and demonstrate how the proposed algorithms improve our Profit & Loss using Monte Carlo simulations.