Regularized Robust Strategic Asset Allocation under Stochastic Variance-Covariance of Asset Returns
Koji Kusuda,
Kentaro Kikuchi
Abstract:This study considers a finite-time robust consumption-investment problem under a quadratic security market model with stochastic variances and covariances of asset returns, as well as stochastic interest rates, market price of risk, and inflation rates. Because the optimal portfolio is proportional to the inverse of the stochastic variance-covariance matrix of asset returns, it becomes unstable when near-singularity of the variance-covariance matrix occurs. We propose a regularized consumption-investment probl… Show more
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