Optimal Investment Strategies in Discrete-Time With Access to Derivatives <br/>

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Optimal Investment Strategies in Discrete-Time With Access to Derivatives

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 43036 (01)
University: Sharif University of Technology
Department: Industrial Engineering
Advisor(s): Kianfar, Farhad
Abstract:
Optimal investment strategies are often derived in continuous time models, but have to be implemented in discrete time. It has been shown that in models with stochastic volatility or jumps; this could lead to significant utility loss, for an investor who utilizes ‘Derivatives’ in his/her portfolio. In this study, we determine the optimal investment strategies with discrete trading explicitly taken into account, through ‘Stochastic Dynamic Programming’. These strategies are in the form of optimal factor exposures for portfolio. The investor, then, needs to use sufficient non-redundant Derivatives in addition to the ‘Stock’ to gain the desired exposures in each point of state space he meet. The results show that the investor buys a more conservative portfolio and reduces extreme positions in the derivatives compared to the continuous time case. In particular, his exposure to volatility risk is significantly reduced
Keywords:
Stochastic Dynamic Programming ; Monte Carlo Simulation ; Financial Derivative Instrument ; Optimal Investment Strategies ; Discrete Trading ; Stochastic Volatility with Jump

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