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A comonotonic approximation to optimal terminal wealth under a multivariate Merton model with correlated jump risk

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  • Afhami, Bahareh
  • Rezapour, Mohsen
  • Madadi, Mohsen
  • Maroufy, Vahed

Abstract

Portfolio selection in a periodic investment of securities is modeled using a multivariate Merton model with dependent jumps and an optimization framework is designed to maximize expected terminal wealth when portfolio risk is measured by Condition Value-at-Risk (CVaR). Solving the portfolio optimization problem by Markov Chain Monte Carlo (MCMC) simulation often leads to expensive and slow computation; hence, a faster optimization method based on comonotonic bounds for the risk measure CVaR of the terminal wealth is proposed here. Precision, efficiency, and computation speed of our proposed methods for approximating CVaR of terminal wealth is assessed through several simulation studies, and the novel methods are applied to the daily price data of the stocks of Zoom Video Communication Inc. (ZM) and Tesla Inc. (TSLA).

Suggested Citation

  • Afhami, Bahareh & Rezapour, Mohsen & Madadi, Mohsen & Maroufy, Vahed, 2023. "A comonotonic approximation to optimal terminal wealth under a multivariate Merton model with correlated jump risk," Applied Mathematics and Computation, Elsevier, vol. 444(C).
    • Handle: RePEc:eee:apmaco:v:444:y:2023:i:c:s0096300322008761
    DOI: 10.1016/j.amc.2022.127808
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