Super-Diffusive Noise Source in Asset Dynamics
- 1 Ecole Polytechnique Fédérale de Lausanne (EPFL), IMT/STI/LPM, Lausanne, Switzerland
Abstract
Given an asset with value S t , we revisit the Black and Scholes dynamics when the driving noise ξ t is a non-Gaussian super-diffusive stochastic process with variance of the type . This super-diffusive quadratic variance behavior, synthesizes a ballistic component which would occur in strongly fluctuating environments. When , the assets can, with high probability, be driven towards the bankruptcy . This extra dynamic feature significantly affects the management of an optimal portfolio. In this context, we focus on basic decisions like: 1 ) determine the optimal level to sell the asset ; 2 ) determine how to balance a portfolio which incorporates such a high volatility asset ; and 3 ) when facing incertitudes on the asset ’ s growth rate μ , construct an optimal adaptive portfolio control. In all mentioned cases and despite the presence of this highly non-Gaussian noise source, we are able to deliver simple exact and fully explicit optimal control rules.
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