Open-Loop Equilibrium Strategy for Mean-Variance Portfolio Problem Under Stochastic Volatility
26 Pages Posted: 27 Sep 2018 Last revised: 2 Feb 2019
Date Written: September 8, 2018
Abstract
We formulate the open-loop control framework for time-consistent mean-variance (TCMV) portfolio problems in incomplete markets with stochastic volatility (SV). We offer the existence and uniqueness results of the TCMV equilibrium controls for general SV models and derive explicit closed-form equilibrium controls for several popular models, including the Heston, Hull-White and 3/2 SV models. The uniqueness of the equilibrium controls are related to the mean-reverting speed of the volatility and the investment horizon.
Keywords: Mean-Variance Portfolio, Open-Loop Stochastic Control, Stochastic Volatility Model, Time Inconsistency
JEL Classification: C61, G11
Suggested Citation: Suggested Citation