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    This article has been cited by the following publications. This list is generated based on data provided by CrossRef.

    Escobar, Marcos Ferrando, Sebastian and Rubtsov, Alexey 2016. Optimal investment under multi-factor stochastic volatility. Quantitative Finance, p. 1.


    Rytchkov, Oleg 2016. Time-Varying Margin Requirements and Optimal Portfolio Choice. Journal of Financial and Quantitative Analysis, Vol. 51, Issue. 02, p. 655.


    Song, Zhaogang and Xiu, Dacheng 2016. A tale of two option markets: Pricing kernels and volatility risk. Journal of Econometrics, Vol. 190, Issue. 1, p. 176.


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  • Journal of Financial and Quantitative Analysis, Volume 47, Issue 2
  • April 2012, pp. 273-307

Volatility Trading: What Is the Role of the Long-Run Volatility Component?

  • Guofu Zhou (a1) and Yingzi Zhu (a2)
  • DOI: http://dx.doi.org/10.1017/S0022109012000105
  • Published online: 20 January 2012
Abstract
Abstract

We study an investor’s asset allocation problem with a recursive utility and with tradable volatility that follows a 2-factor stochastic volatility model. Consistent with previous findings under the additive utility, we show that the investor can benefit substantially from volatility trading due to hedging demand. Unlike existing studies, we find that the impact of elasticity of intertemporal substitution (EIS) on investment decisions is of 1st-order importance. Moreover, the investor can incur significant economic losses due to model and/or parameter misspecifications where the EIS better captures the investor’s attitude toward risk than the risk aversion parameter.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
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