Optimal Portfolios and Heston's Stochastic Volatility Model

Abstract:     
Given an investor maximizing utility from terminal wealth with respect to a power utility function, we present a verification result for portfolio problems with stochastic volatility. Applying this result, we solve the portfolio problem for Heston's stochastic volatility model. We find that only under a specific condition on the model parameters the problem possesses a unique solution leading to a partial equilibrium.

Keywords: Optimal portfolios, stochastic volatility, Heston model

JEL Classification: G11

working papers series