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Mathematics and Financial Economics
Erschienen in: Mathematics and Financial Economics 4/2018

15.05.2018

Dynamic asset allocation with event risk, transaction costs and predictable returns

verfasst von: Jean-Guy Simonato

Erschienen in: Mathematics and Financial Economics | Ausgabe 4/2018

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Abstract

We examine the interplay between event risk, transaction costs and predictability on the dynamic asset allocation of an investor with discrete trading opportunities. The model is calibrated to the U.S. stock market and a Gauss–Hermite quadrature approach is used to solve the investor’s dynamic optimization problem. Numerical scenarios are examined to show the impact of event risk on asset allocations, hedging demands, no-trading regions, and certainty equivalent returns. It is found that event risk shrinks hedging demand. Neglecting event risk can also lead to sizeable certainty equivalent return losses.
Vorheriger Artikel Sensitivity analysis for marked Hawkes processes: application to CLO pricing
Nächster Artikel Arbitrage and utility maximization in market models with an insider

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Fußnoten
1
To simplify the exposition, when there is no possible ambiguity, we will refer to the “log dividend yield” as the “dividend yield”.
 
2
Under this definition, the periodic excess return is computed as \(R_{t}\triangleq R_{t}^{g}-R_{f}=R_{f}(e^{r_{t} }-1)\).
 
3
This rate is obtained from the average of the simple gross risk-free rate, converted to a continuous rate, and annualized i.e. \(\ln \left( 1.004\right) \times 12=0.048\).
 
4
The mean reverting process of the log dividend yield implies a Gaussian distribution with an unconditional mean given by \(\alpha _{d}/(1-\beta _{d})\) and a variance \((\sigma _{\epsilon _{d}}^{2}\times \Delta t)/(1-\beta _{d}^{2})\).
 
5
An allocation is in the no-trade region when the difference between the optimal allocation and the inherited allocation is smaller than 0.01.
 
6
Recall that, without jumps, the log returns are normal, while the simple holding period returns are lognormal.
 
7
The optimal policy of an investor who trades quarterly and considers jumps is not computed here since the probability of a jump cannot simply be scaled by \(\Delta t\) in the context of our discrete time series model.
 
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Metadaten
Titel
Dynamic asset allocation with event risk, transaction costs and predictable returns
verfasst von
Jean-Guy Simonato
Publikationsdatum
15.05.2018
Verlag
Springer Berlin Heidelberg
Erschienen in
Mathematics and Financial Economics / Ausgabe 4/2018
Print ISSN: 1862-9679
Elektronische ISSN: 1862-9660
DOI
https://doi.org/10.1007/s11579-018-0216-5

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