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Optimal Portfolio Application with Double-Uniform Jump Model

In: Stochastic Processes, Optimization, and Control Theory: Applications in Financial Engineering, Queueing Networks, and Manufacturing Systems

Author

Listed:
  • Zongwu Zhu

    (University of Illinois at Chicago)

  • Floyd B. Hanson

    (University of Illinois at Chicago)

Abstract

This paper treats jump-diffusion processes in continuous time, with emphasis on the jump-amplitude distributions, developing more appropriate models using parameter estimation for the market in one phase and then applying the resulting model to a stochastic optimal portfolio application in a second phase. The new developments are the use of double-uniform jump-amplitude distributions and time-varying market parameters, introducing more realism into the application model — a lognormal diffusion, log-double-uniform jump-amplitude model. Although unlimited borrowing and short-selling play an important role in pure diffusion models, it is shown that borrowing and shorting is limited for jump-diffusions, but finite jump-amplitude models can allow very large limits in contrast to infinite range models which severely restrict the instant stock fraction to [0,1]. Among all the time-dependent parameters modeled, it appears that the interest and discount rate have the strongest effects.

Suggested Citation

  • Zongwu Zhu & Floyd B. Hanson, 2006. "Optimal Portfolio Application with Double-Uniform Jump Model," International Series in Operations Research & Management Science, in: Houmin Yan & George Yin & Qing Zhang (ed.), Stochastic Processes, Optimization, and Control Theory: Applications in Financial Engineering, Queueing Networks, and Manufacturing Systems, chapter 0, pages 331-358, Springer.
    • Handle: RePEc:spr:isochp:978-0-387-33815-6_16
    DOI: 10.1007/0-387-33815-2_16
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