In this paper we are interested in an investment problem with stochastic volatilities and portfolio constraints on amounts. We model the risky assets by jump diffusion processes and we consider an exponential utility function. The objective is to maximize the expected utility from the investor terminal wealth. The value function is known to be a viscosity solution of an integro-differential Hamilton-Jacobi-Bellman (HJB in short) equation which could not be solved when the risky assets number exceeds three. Thanks to an exponential transformation, we reduce the nonlinearity of the HJB equation to a semilinear equation. We prove the existence of a smooth solution to the latter equation and we state a verification theorem which relates this solution to the value function. We present an example that shows the importance of this reduction for numerical study of the optimal portfolio. We then compute the optimal strategy of investment by solving the associated optimization problem.
Applied Mathematics and Optimization – Springer Journals
Published: Sep 1, 2007
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