Not Available for Download

Optimal Portfolios when Variances and Covariances can Jump

Posted: 12 Mar 2015 Last revised: 8 Oct 2017

Nicole Branger

University of Muenster - Finance Center Muenster

Matthias Muck

University of Bamberg

Frank Thomas Seifried

University of Trier

Stefan Weisheit

University of Bamberg

Date Written: September 30, 2016

Abstract

We analyze the optimal portfolio choice in a multi-asset Wishart-model in which return variances and correlations are stochastic and subject to jump risk. The optimal portfolio is characterized by the positions in stock diffusion risk, variance-covariance diffusion risk, and jump risk. We find that including jumps in the second moments changes the optimal positions and particularly variance-covariance hedging demands significantly. Furthermore, we show that the utility gains from market completeness are significant. They increase in the amount of uncertainty in second moments, in particular in the size of variance-covariance jumps and in the intensity of jumps. As a robustness check, we compare our results to those obtained for other parametrizations of Wishart-models from the literature as well as to various single-asset models.

Keywords: Optimal portfolio choice, stochastic correlation, Wishart process, derivatives, jump risk, covariance jumps

JEL Classification: G11, G13

Suggested Citation

Branger, Nicole and Muck, Matthias and Seifried, Frank Thomas and Weisheit, Stefan, Optimal Portfolios when Variances and Covariances can Jump (September 30, 2016). Available at SSRN: https://ssrn.com/abstract=2577179 or http://dx.doi.org/10.2139/ssrn.2577179

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Matthias Muck

University of Bamberg ( email )

Kärntenstr. 7
Bamberg, 96052
Germany
+49-(0)951-860-2091 (Phone)

Frank Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

Stefan Weisheit (Contact Author)

University of Bamberg ( email )

Kärntenstr. 7
Bamberg, 96052
Germany
+49 951 / 863 2091 (Phone)

HOME PAGE: http://www.uni-bamberg.de/bwl-bfc/

Paper statistics

Abstract Views
715