Actuarial Studies seminar - Professor Marcos Escobar - Western University Canada

A seminar by Professor Marcos Escobar from Western University Canada

Title: Portfolio Optimization in Affine GARCH models.

Abstract: Affine GARCH models, pioneered by Heston and Nandi (2000), combine the observation-driven estimation advantages of discrete-time GARCH with the exponential-affine tractability familiar from continuous-time stochastic-volatility models. This talk surveys a roughly half-decade research program on dynamic portfolio choice within this class. The key step is a second-order approximation to log self-financing that preserves affine wealth dynamics; under this approximation, the discrete-time Bellman recursion closes in exponential-affine form and yields analytical portfolio rules for a broad class of Affine GARCH specifications. I develop the core method through two benchmark results: a single-asset CRRA allocation and its multi-asset extension under a parsimonious CAPM-style specification. I then examine the accuracy and economic cost of the approximation and survey extensions to non-Gaussian innovations, alternative preferences, derivatives, and Bayesian parameter uncertainty, together with ongoing directions involving bonds, commodities, VIX, and other affine markets. 

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