Monte Carlo Valuation of Optimal Portfolios in Complete Markets

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  • 1 January 2000
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      • Published in RePEc
Abstract
We introduce a method that relies exclusively on Monte Carlo simulation in order to compute optimal portfolios. Our method is completely general and only requires complete markets and knowledge of the dynamics of the security processes. It is precise and easy to implement. It can be applied regardless or the number of factors and of whether the agent derives utility from intertemporal consumption, terminal wealth or both. We perform some comparative statics and find that portfolios are sensitive to parameter values outside the class of affine models traditionally considered in the literature. The method we suggest can also be applied to the computation of the optimal hedge of a derivative when Monte Carlo simulation is used as a pricing method.
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