Semi-analytical solutions for dynamic portfolio choice in jump-diffusion models and the optimal bond-stock mix

摘要

Highlights?Solving the optimal dynamic portfolio choice in jump-diffusion models semi-analytically.?Providing an efficient method for HARA preference in the optimal dynamic portfolio choice.?Illustrating that the hedging assumption fails to resolve the asset allocation puzzle with jump.AbstractThis paper studies the optimal portfolio selection problem in jump-diffusion models where an investor has a HARA utility function, and there are potentially a large number of assets and state variables. More specifically, we incorporate jumps into both stock returns and state variables, and then derive semi-analytical solutions for the optimal portfolio policy up to solving a set of ordinary differential equations to greatly facilitate economic insights and empirical applications of jump-diffusion models. To examine the effect of jump risk on investors’ behavior, we apply our results to the bond-stock mix problem and particularly revisit the bond/stock ratio puzzle in jump-diffusion