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Title: Robust consumption and portfolio choice with derivatives trading
Authors: Wei, Pengyu
Yang, Charles
Zhuang, Yi
Keywords: Business::Finance
Issue Date: 2023
Source: Wei, P., Yang, C. & Zhuang, Y. (2023). Robust consumption and portfolio choice with derivatives trading. European Journal of Operational Research, 304(2), 832-850.
Journal: European Journal of Operational Research
Abstract: This paper analyzes the optimal consumption and portfolio choice problem for an ambiguity-averse investor with recursive preferences. The investor has access to both the stock and derivatives markets. The stock price process follows a stochastic volatility jump-diffusion model and the investor can have different levels of ambiguity about diffusion and jump risks, respectively. We obtain an exact analytical solution for investors with unit elasticity of intertemporal substitution of consumption and an approximate solution otherwise. We find that the optimal consumption policy is more sensitive to ambiguity aversion with respect to diffusion risks than the jump risk. The optimal exposures to diffusion and jump risks are significantly affected by the corresponding ambiguity aversions in the complete market; however, the optimal stock investment is relatively insensitive to jump misspecification in the incomplete market. We also show that taking into consideration ambiguity aversion to diffusion risks and participating in the derivatives market are essential to reduce the potential welfare loss, while the impact of jump misspecification is marginal.
ISSN: 0377-2217
DOI: 10.1016/j.ejor.2022.04.021
Schools: Nanyang Business School 
Rights: © 2022 Elsevier B.V. All rights reserved. This paper was published in European Journal of Operational Research and is made available with permission of Elsevier B.V.
Fulltext Permission: embargo_20250123
Fulltext Availability: With Fulltext
Appears in Collections:NBS Journal Articles

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