A0353
Title: Dynamic derivative-based pension investment with stochastic volatility: A behavioral perspective
Authors: Yang Shen - UNSW (Australia) [presenting]
Abstract: The derivative-based optimal investment problem is studied for a loss-averse pension investor under the Heston stochastic volatility model. By the inverse Fourier transform method and the martingale approach, a semi-analytical form for the optimal investment strategy is obtained. The distinct roles of preferences, wealth goals, and market conditions in the investors' optimal decision are investigated, and the dynamic relationship between these factors and derivatives trading is clarified. It is found that: 1) The investor with different risk preferences has different motivations for trading derivatives. 2) When the reference point is high, the investor facing positively priced volatility risk is keen to pursue risks, resulting in large trading positions in derivatives, while the investor facing negatively priced volatility risk tends to reduce the short positions in derivatives to avoid suffering great losses. 3) A portfolio decomposition illustrates that the optimal investment strategy is influenced by both psychological and risk-averse factors.
