Author(s)

Yansong Wang ¹, Xianshuo Qi ²

Affiliation(s)

¹ Evergrowing Bank Co., Ltd, Jinan, Shandong, 250000, China
² Department of Economics, University of Wisconsin-Madison, Madison, Wisconsin, 53706, USA

Corresponding Author

Yansong Wang

ABSTRACT

This paper investigates the situation in Merton (1969) model that volatility is a constant rather than a stochastic process, then points out that this is a model misspecification since it doesn't match the real market. Next, the HJB equation with stochastic volatility is derived through stochastic control, thereby calibrate model misspecification.

KEYWORDS

Stochastic Control, DPP, HJB, Model Misspecification

CITE THIS PAPER

Yansong Wang, Xianshuo Qi, Model Misspecification in Portfolio Optimization. Financial Engineering and Risk Management (2023) Vol. 6: 39-42. DOI: http://dx.doi.org/10.23977/ferm.2023.060706.

REFERENCES

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[4] Merton R C. Lifetime portfolio selection under uncertainty: The continuous-time case [J]. The review of Economics and Statistics, 1969: 247-257.
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[6] Li J, Wu R. Optimal investment problem with stochastic interest rate and stochastic volatility: maximizing a power utility [J]. Applied Stochastic Models in Business and Industry, 2009, 25(3): 407-420.
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