A Benchmark Approach to Portfolio Optimization under Partial Information

Eckhard Platen () and Wolfgang Runggaldier
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Wolfgang Runggaldier: Department of Pure and Applied Mathematics, University of Padova

No 191, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper proposes a filtering methodology for portfolio optimization when some factors of the underlying model are only partially observed. The level of information is given by the observed quantities that are here supposed to be the primary securities and empirical log-price covariations. For a given level of information we determine the growth optimal portfolio, identify locally optimal portfolios that are located on a corresponding Markowitz efficient frontier and present an approach for expected utility maximization. We also present an expected utility indifference pricing approach under partial information for the pricing of nonreplicable contracts. This results in a real world pricing formula under partial information that turns out to be independent of the subjective utility of the investor and for which an equivalent risk neutral probability measure need not exist.

Keywords: portfolio ptimization; partial information; filtering, growth optimal portfolio; expected utility maximization; utility indifference pricing; real world pricing formula (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2007-01-01
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Journal Article: A Benchmark Approach to Portfolio Optimization under Partial Information (2007)
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