Title :
A numerical method for financial decision problems under stochastic volatility
Author :
Zhou, Enlu ; Lin, Kun ; Fu, Michael C. ; Marcus, Steven I.
Author_Institution :
Inst. for Syst. Res., Univ. of Maryland, Coll. Park, College Park, MD, USA
Abstract :
In many financial decision problems, such as portfolio optimization or hedging, the goal is to compute an optimal investment strategy, in order to maximize expected utility or minimize expected risk. If the volatility of the risky asset(s) follows a stochastic process and is not observable, the problems usually do not have analytical solutions. Hence, we propose an efficient numerical method for these problems, based on a method developed recently for solving continuous-state partially observable Markov decision processes. Numerical applications are presented and discussed for a problem of hedging European put and call options.
Keywords :
Markov processes; financial management; investment; optimisation; risk management; European call options; European put option; continuous-state partially observable Markov decision processes; financial decision problems; hedging; numerical method; optimal investment strategy; portfolio optimization; risky assets volatility; stochastic process; stochastic volatility; Decision making; Educational institutions; Investments; Optimization methods; Portfolios; Quantization; Risk analysis; Stochastic processes; Stochastic systems; Utility theory;
Conference_Titel :
Simulation Conference (WSC), Proceedings of the 2009 Winter
Conference_Location :
Austin, TX
Print_ISBN :
978-1-4244-5770-0
DOI :
10.1109/WSC.2009.5429700