Optimizing the terminal wealth under partial information: The drift process as a continuous time Markov chain

Jörn Sass () and Ulrich Haussmann ()

Finance and Stochastics, 2004, vol. 8, issue 4, 553-577

Abstract: We consider a multi-stock market model where prices satisfy a stochastic differential equation with instantaneous rates of return modeled as a continuous time Markov chain with finitely many states. Partial observation means that only the prices are observable. For the investor’s objective of maximizing the expected utility of the terminal wealth we derive an explicit representation of the optimal trading strategy in terms of the unnormalized filter of the drift process, using HMM filtering results and Malliavin calculus. The optimal strategy can be determined numerically and parameters can be estimated using the EM algorithm. The results are applied to historical prices. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Portfolio optimization; partial information; continuous time Markov chain; HMM filtering; stochastic interest rates (search for similar items in EconPapers)
Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (80)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00780-004-0132-9 (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:spr:finsto:v:8:y:2004:i:4:p:553-577

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-004-0132-9

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().