1. A new type of CEV model: properties, comparison, and application to portfolio optimization.
- Author
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Anel, Marcos Escobar and Fan, Wei Li
- Subjects
- *
UTILITY theory , *PORTFOLIO management (Investments) , *ORNSTEIN-Uhlenbeck process , *INVESTORS , *ABNORMAL returns - Abstract
This article proposes and studies a new type of constant elasticity of volatility (CEV) model, titled LVO-CEV, where the name indicates that the excess return is linear in the volatility. The model has either strong or weak solutions, depending on the elasticity parameter, thanks to a connection to radial Ornstein-Uhlenbeck processes. Attainability of lower bounds and the existence of pricing measures are provided. The model allows for closed-form solutions in the context of expected utility theory for investors with hyperbolic absolute risk aversion (HARA) utilities on terminal wealth and consumption. We estimate and implement our model as well as other popular models of indexes and stocks, providing a fair comparison in portfolio management. [ABSTRACT FROM AUTHOR]
- Published
- 2025
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