EXPERT OPINIONS AND LOGARITHMIC UTILITY MAXIMIZATION FOR MULTIVARIATE STOCK RETURNS WITH GAUSSIAN DRIFT

Jörn Sass (), Dorothee Westphal () and Ralf Wunderlich ()
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Jörn Sass: Department of Mathematics, University of Kaiserslautern, P. O. Box 3049, 67653 Kaiserslautern, Germany
Dorothee Westphal: Department of Mathematics, University of Kaiserslautern, P. O. Box 3049, 67653 Kaiserslautern, Germany
Ralf Wunderlich: #x2020;Mathematical Institute, Brandenburg University of Technology Cottbus-Senftenberg, P. O. Box 101344, 03013 Cottbus, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 04, 1-41

Abstract: This paper investigates optimal trading strategies in a financial market with multidimensional stock returns, where the drift is an unobservable multivariate Ornstein–Uhlenbeck process. Information about the drift is obtained by observing stock returns and expert opinions which provide unbiased estimates on the current state of the drift.The optimal trading strategy of investors maximizing expected logarithmic utility of terminal wealth depends on the filter which is the conditional expectation of the drift given the available information. We state filtering equations to describe its dynamics for different information settings. At information dates, the expert opinions lead to an update of the filter which causes a decrease in the conditional covariance matrix. We investigate properties of these conditional covariance matrices. First, we consider the asymptotic behavior of the covariance matrices for an increasing number of expert opinions on a finite time horizon. Second, we state conditions for convergence in infinite time with regularly-arriving expert opinions.Finally, we derive the optimal trading strategy of an investor. The optimal expected logarithmic utility of terminal wealth, the value function, is a functional of the conditional covariance matrices. Hence, our analysis of the covariance matrices allows us to deduce properties of the value function.

Keywords: Conditional covariance matrix; Ornstein–Uhlenbeck process; partial information; portfolio optimization; unbiased expert opinions (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (13)

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DOI: 10.1142/S0219024917500224

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