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Portfolio Selection in Stochastic Environments

  • Jun Liu
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In this article, I explicitly solve dynamic portfolio choice problems, up to the solution of an ordinary differential equation (ODE), when the asset returns are quadratic and the agent has a constant relative risk aversion (CRRA) coefficient. My solution includes as special cases many existing explicit solutions of dynamic portfolio choice problems. I also present three applications that are not in the literature. Application 1 is the bond portfolio selection problem when bond returns are described by "quadratic term structure models." Application 2 is the stock portfolio selection problem when stock return volatility is stochastic as in Heston model. Application 3 is a bond and stock portfolio selection problem when the interest rate is stochastic and stock returns display stochastic volatility. (JEL G11) Copyright 2007, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhl001
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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 20 (2007)
Issue (Month): 1 (January)
Pages: 1-39

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Handle: RePEc:oup:rfinst:v:20:y:2007:i:1:p:1-39
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