Optimal investment in multidimensional Markov-modulated affine models

Daniela Neykova (), Marcos Escobar Anel () and Rudi Zagst

Annals of Finance, 2015, vol. 11, issue 3, 503-530

Abstract: In a multidimensional affine framework we consider a portfolio optimization problem with finite horizon, where an investor aims to maximize the expected utility of her terminal wealth. We state a very flexible asset price model that incorporates several risk factors modeled both by diffusion processes and by a Markov chain. Exploiting the affine structure of the model we solve the corresponding Hamilton–Jacobi–Bellman equations explicitly up to an expectation only over the Markov chain or equivalently up to a system of simple ODEs. The relevance of the presented model is illustrated on two examples including a stochastic short rate model with trading in the bond and the stock market, and a multidimensional stochastic volatility and stochastic correlation model. Precise verification results for both examples are provided. Economic interpretations of the models and results complement the theoretical analysis. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: HJB systems; Utility maximization; Multidimensional affine models; Markov chains; G11; C61 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s10436-015-0268-y

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