TY  - JOUR
T1  - Execute Trading Policies on Optimal Portfolio When Stochastic  Volatility and Inflation Effect Were Considered
AU - Rahadia, Ashri Putri AU - Rizalb, Nora Amelda AU - Suryac, Budhi Arta 
JO  - Journal of Engineering and Applied Sciences
VL  - 11
IS  - 8
SP  - 1706
EP  - 1713
PY  - 2016
DA  - 2001/08/19
SN  - 1816-949x
DO  - jeasci.2016.1706.1713
UR  - https://makhillpublications.co/view-article.php?doi=jeasci.2016.1706.1713
KW  - CEV
KW  -dynamic programming
KW  -HJB
KW  -portfolio optimization
KW  -stochastic control
KW  -vasicek
AB  - Tempting to formulate the long-term investment strategy for investors who dynamically adjust her portfolio over her lifetime, we are interested to optimize the end-of-period terminal wealth using Bellman principles. We designed the portfolio to be replete with risky asset and risk-less asset/fixed-income asset in the continuous framework. The stochastic volatility model is depicted in risky asset dynamic known as Constant Elasticity of Variance (CEV) because the empirical bias of leverage effect in stock price evolution founded by Black Scholes can be directly examined. Meanwhile, the bond pricing analysis was no longer classified as risk-free asset because it was analyzed under the stochastic Inflation and interest rate of affine structures named Vasicek. Because we want to reflect their mean-reverting behavior as they're hovering around their long-term mean. Later, state space was constructed and portion of risky asset was elected to be control variables for supremum over value function. The concept of investment decision is intertemporal as today decision affected tomorrow's which finding its optimal rate would be trade-off for investor. For this, we framed the decision criteria with investor's utility function from class Decreasing Absolute Risk Aversion (DARA), the class that generally most investor mostly consistent with. The problem description above can be represented as stochastic optimal control problem and it was solved with dynamic programming argument with modified verification theorem to tackle the issue of Stochastic Differential Equation well-posedness violation. Through stages of change variables, we were able to find the closed form trading solution from corresponding Hamilton Jacobi Bellman (HJB) equation. Compare to standard Merton model, our trading strategies strength are determining interest rate, inflation rate and degree of leverage for improvement and hence have inline economic logic reasoning for our solutions.
ER  -