Dynamic Optimal Investment Strategy Based On Momentum And Mean Reversion Effect Under CARA Preference

Many literature studies have shown that momentum effects and mean reversion phenomena are widely present in financial data series such as stocks,interest rates,and exchange rates.To some extent,they reflect the inherent equilibrium mechanism of asset price series.The momentum effect is a general financial phenomenon in the financial market,which means that assets with higher returns in the previous period will continue to receive significant high returns in the next period.The financial time series usually fluctuates around the mean.The lower returns usually follow the higher returns,and can also be expressed as the trend of the mean reversion of the asset price time series.This phenomenon is called mean reversion.This paper studies the dynamic asset allocation problem when investors have CARA utility preference in time-varying financial markets.We often assume that the asset price in the financial market satisfies some form of Brownian motion,and this paper focuses on introducing the mean reversion in the asset price model,introducing an intuitive and simple stock return model.In other words,this paper adds the momentum and mean reversion state variables to the stock price process,and further studies the investor's optimal investment strategy when investors have CARA preference.Finally,the article uses comparative static analysis method to study the optimal asset allocation problem when investors have CARA preference under the momentum and mean reversion of risk assets.