Volatility Trading and the Elasticity of Intertemporal Substitution
In this paper, we study an investors asset allocation problem with recursive utility and with tradable volatility that follows a two-factor stochastic volatility model. Consistent with Liu and Pans (2003) findings under additive utility, we find that volatility trading generates substantial hedging demand and horizon effect, and that the investor can benefit substantially from volatility trading. However, unlike existing studies, we find that the impact of elasticity of intertemporal substitution on investment decisions is of first-order importance once the investor has access not only to bond and stock markets but also to the derivatives market, and that the investor optimally chooses to hedge the persistent component of the volatility shocks. Moreover, we find that the elasticity of intertemporal substitution is a more sensible description of investors attitude toward model uncertainty and parameter uncertainty than the risk aversion parameter.
Guofu Zhou Yingzi Zhu
Olin School of Business, Washington University, St. Louis, MO 63130 Tsinghua University
国际会议
广州
英文
1-50
2009-07-07（万方平台首次上网日期，不代表论文的发表时间）