Portfolio choice with jumps: a closed-form solution. (English) Zbl 1170.91364

Summary: We analyze the consumption-portfolio selection problem of an investor facing both Brownian and jump risks. We bring new tools, in the form of orthogonal decompositions, to bear on the problem in order to determine the optimal portfolio in closed form. We show that the optimal policy is for the investor to focus on controlling his exposure to the jump risk, while exploiting differences in the Brownian risk of the asset returns that lies in the orthogonal space.


91G10 Portfolio theory
60J75 Jump processes (MSC2010)
93E20 Optimal stochastic control
Full Text: DOI arXiv


[1] Aase, K. K. (1984). Optimum portfolio diversification in a general continuous-time model. Stochastic Process. Appl. 18 81-98. · Zbl 0541.60057
[2] Ang, A. and Bekaert, G. (2002). International asset allocation with regime shifts. Review of Financial Studies 15 1137-1187.
[3] Ang, A. and Chen, J. (2002). Asymmetric correlations of equity portfolios. Journal of Financial Economics 63 443-494.
[4] Bae, K.-H., Karolyi, G. A. and Stulz, R. M. (2003). A new approach to measuring financial contagion. Review of Financial Studies 16 717-763.
[5] Choulli, T. and Hurd, T. R. (2001). The role of Hellinger processes in mathematical finance. Entropy 3 150-161. · Zbl 1015.91030
[6] Cvitanić, J., Polimenis, V. and Zapatero, F. (2008). Optimal portfolio allocation with higher moments. Annals of Finance 4 1-28. · Zbl 1233.91238
[7] Das, S. and Uppal, R. (2004). Systemic risk and international portfolio choice. Journal of Finance 59 2809-2834.
[8] Emmer, S. and Klüppelberg, C. (2004). Optimal portfolios when stock prices follow an exponential Lévy process. Finance Stoch. 8 17-44. · Zbl 1051.60049
[9] Grauer, R. and Hakansson, N. (1987). Gains from international diversification: 1968-1985 returns on portfolios of stocks and bonds. Journal of Finance 42 721-739.
[10] Han, S. and Rachev, S. (2000). Portfolio management with stable distributions. Math. Methods Oper. Res. 51 341-352. · Zbl 1016.91060
[11] Hartmann, P., Straetmans, S. and de Vries, C. (2004). Asset market linkages in crisis periods. Review of Economics and Statistics 86 313-326.
[12] Jeanblanc-Picqué, M. and Pontier, M. (1990). Optimal portfolio for a small investor in a market model with discontinuous prices. Appl. Math. Optim. 22 287-310. · Zbl 0715.90014
[13] Kallsen, J. (2000). Optimal portfolios for exponential Lévy processes. Math. Methods Oper. Res. 51 357-374. · Zbl 1054.91038
[14] Liu, J., Longstaff, F. and Pan, J. (2003). Dynamic asset allocation with event risk. J. Finance 58 231-259.
[15] Longin, F. and Solnik, B. (2001). Extreme correlation of international equity markets. J. Finance 56 649-676.
[16] Madan, D. (2004). Equilibrium asset pricing with non-Gaussian factors and exponential utilities. Technical report, Univ. Maryland. · Zbl 1134.91448
[17] Merton, R. C. (1969). Lifetime portfolio selection under uncertainty: The continuous-time case. Review of Economics and Statistics 51 247-257.
[18] Merton, R. C. (1971). Optimum consumption and portfolio rules in a continuous-time model. J. Econom. Theory 3 373-413. · Zbl 1011.91502
[19] Ortobelli, S., Huber, I., Rachev, S. T. and Schwartz, E. S. (2003). Portfolio choice theory with non-Gaussian distributed returns. In Handbook of Heavy Tailed Distributions in Finance (S. T. Rachev, ed.) 547-594. Elsevier, Amsterdam.
[20] Shirakawa, H. (1990). Optimal dividend and portfolio decisions with Poisson and diffusion-type return process. Technical report, Tokyo Institute of Technology.
[21] Solnik, B. (1974). Why not diversify internationally rather than domestically? Financial Analysts Journal 30 48-53.
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.