Journal of Investment Strategies
ISSN:
2047-1238 (print)
2047-1246 (online)
Editor-in-chief: Ali Hirsa
Need to know
- We revisit the classical Merton optimal allocation problem.
- We consider local and stochastic volatility models.
- Significant corrections to the Merton ratio arise from hard to observe behavior of the variance process around zero.
- Having corrected the dynamics of the variance process around zero we show that the adjustment to the myopic Merton ratio can be largely deduced from observed option prices.
- This paves the way to a practical approach to a more efficient asset allocation.
Abstract
We revisit the classical Merton optimal allocation problem and show that significant corrections to the Merton ratio arise from the hard-to-observe behavior of the volatility process around zero. Having regularized this behavior, we show that the adjustment to the “myopic” Merton ratio can be largely deduced from observed option prices, which paves the way for a practical approach to more efficient asset allocation.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
