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2005•SSRN Electronic JournalOpen access

Optimal Portfolios and Heston's Stochastic Volatility Model

Holger Kraft

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Abstract

Given an investor maximizing utility from terminal wealth with respect to a power utility function, we present a verification result for portfolio problems with stochastic volatility. Applying this result, we solve the portfolio problem for Heston's stochastic volatility model. We find that only under a specific condition on the model parameters the problem possesses a unique solution leading to a partial equilibrium.

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What this paper is about

Given an investor maximizing utility from terminal wealth with respect to a power utility function, we present a verification result for portfolio problems with stochastic volatility. Applying this result, we solve the portfolio problem for Heston's stochastic volatility model. We find that only under a specific condition on the model parameters the problem possesses a unique solution leading to a partial equilibrium.

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OpenAlex reports 18 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

Given an investor maximizing utility from terminal wealth with respect to a power utility function, we present a verification result for portfolio problems with stochastic volatility. Applying this result, we solve the portfolio problem for Heston's stochastic volatility model. We find that only under a specific condition on the model parameters the problem possesses a unique solution leading to a partial equilibrium.

Key concepts: Heston model, Stochastic volatility, Portfolio, Volatility (finance), Economics, Econometrics, SABR volatility model, Volatility smile

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