Expected Log-Utility Maximization Under Incomplete Information and with Cox-Process Observations

Kazufumi Fujimoto (), Hideo Nagai () and Wolfgang Runggaldier ()

Asia-Pacific Financial Markets, 2014, vol. 21, issue 1, 35-66

Abstract: We consider the portfolio optimization problem for the criterion of maximization of expected terminal log-utility. The underlying market model is a regime-switching diffusion model where the regime is determined by an unobservable factor process forming a finite state Markov process. The main novelty is due to the fact that prices are observed and the portfolio is rebalanced only at random times corresponding to a Cox process where the intensity is driven by the unobserved Markovian factor process as well. This leads to a more realistic modeling for many practical situations, like in markets with liquidity restrictions; on the other hand it considerably complicates the problem to the point that traditional methodologies cannot be directly applied. The approach presented here is specific to the log-utility. For power utilities a different approach is presented in the companion paper (Fujimoto et al. in Appl Math Optim 67(1):33–72, 2013 ). Copyright Springer Japan 2014

Keywords: Portfolio optimization; Stochastic control; Incomplete information; Regime-switching models; Cox-process observations; Random trading times (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10690-013-9176-1 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:apfinm:v:21:y:2014:i:1:p:35-66

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10690/PS2

DOI: 10.1007/s10690-013-9176-1

Access Statistics for this article

Asia-Pacific Financial Markets is currently edited by Jiro Akahori

More articles in Asia-Pacific Financial Markets from Springer, Japanese Association of Financial Economics and Engineering
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().