Asymptotic analysis for a downside risk minimization problem under partial information
Yûsuke Watanabe
Stochastic Processes and their Applications, 2013, vol. 123, issue 3, 1046-1082
Abstract:
We give an analytic characterization of a large-time “downside risk” probability associated with an investor’s wealth. We assume that risky securities in our market model are affected by “hidden” economic factors, which evolve as a finite-state Markov chain. We formalize and prove a duality relation between downside risk minimization and the related risk-sensitive optimization. The proof is based on an analysis of an ergodic-type Hamilton–Jacobi–Bellman equation with large (exponentially growing) drift.
Keywords: Large deviations; Risk-sensitive control; Degenerate ergodic HJB equation; Nonlinear filtering equation; Hidden Markov model (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:spapps:v:123:y:2013:i:3:p:1046-1082
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DOI: 10.1016/j.spa.2012.11.005
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