A Perturbation Approach to Continuous-Time Portfolio Selection

38 Pages Posted: 27 Sep 2013 Last revised: 1 Jun 2016

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Date Written: May 30, 2016

Abstract

This paper studies portfolio selection in continuous-time models with stochastic investment opportunities. We consider asset allocation problems where preferences are specified as power utility derived from terminal wealth as well as consumption-savings problems with recursive utility Epstein-Zin preferences. The paper approximates the associated dynamic programming problem by perturbing the coefficients of the stochastic dynamics. We represent the Hamilton-Jacobi-Bellman equation as a series of partial differential equations that can be solved iteratively in closed-form through computer algebra software, at any desired accuracy.

Keywords: perturbation, hedge demand, consumption, stochastic state variables

JEL Classification: G11, G13

Suggested Citation

Leisen, Dietmar P. J., A Perturbation Approach to Continuous-Time Portfolio Selection (May 30, 2016). Available at SSRN: https://ssrn.com/abstract=2331434 or http://dx.doi.org/10.2139/ssrn.2331434

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

Jakob-Welder-Weg 9
Mainz, D-55099
Germany
++49-6131-39 22097 (Phone)
++49-6131-39 23971 (Fax)

HOME PAGE: http://www.finserv.bwl.uni-mainz.de/index_ENG.php

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