Abstract
AbstractI have developed an intertemporal portfolio choice model with jump risks. It can be applied to pension and life insurance funds, and private investors. Following the model of Rudolf and Ziemba (2004), these long-term investors aspire to “maximize the intertemporal expected utility of the surplus”, which is defined as “assets net of liabilities”. Return on liabilities are modelled by a typical pure-diffusion process. Return on assets are assumed to follow a jump-diffusion process with two jump components. More specifically, the first jump component represents a systemic risk according to Das and Uppal (2004) and the second jump component represents an idiosyncratic risk according to Jarrow and Rosenfeld (1984). An investor's optimal portfolio consists of three funds: a market portfolio, a liability-hedging portfolio, and a riskless asset. In contrast to the results of Rudolf and Ziemba (2004), a market portfolio not only hedges diffusion risk, but it also hedges systemic risk and it takes into account idiosyncratic jump risk so that the investor is additionally protected against both a systemic risk and an idiosyncratic jump risk.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
