A Perturbation Approach to Continuous-Time Portfolio Selection
38 Pages Posted: 27 Sep 2013 Last revised: 1 Jun 2016
Date Written: May 30, 2016
This paper studies portfolio selection in continuous-time models with stochastic investment opportunities. We consider asset allocation problems where preferences are specified as power utility derived from terminal wealth as well as consumption-savings problems with recursive utility Epstein-Zin preferences. The paper approximates the associated dynamic programming problem by perturbing the coefficients of the stochastic dynamics. We represent the Hamilton-Jacobi-Bellman equation as a series of partial differential equations that can be solved iteratively in closed-form through computer algebra software, at any desired accuracy.
Keywords: perturbation, hedge demand, consumption, stochastic state variables
JEL Classification: G11, G13
Suggested Citation: Suggested Citation