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Optimal investment and consumption under partial information

Kristoffer Lindensjö ()
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Kristoffer Lindensjö: Stockholm School of Economics

Mathematical Methods of Operations Research, 2016, vol. 83, issue 1, 87-107

Abstract: Abstract We present a unified approach for partial information optimal investment and consumption problems in a non-Markovian Itô process market. The stochastic local mean rate of return and the Wiener process cannot be observed by the agent, whereas the path-dependent volatility, the path-dependent interest rate and the asset prices can be observed. The main assumption is that the asset price volatility is a nonanticipative functional of the asset price trajectory. The utility functions are general and satisfy standard conditions. First, we show that the corresponding full information market is complete and in this setting we solve the problem using standard methods. Second, we transform the original partial information problem into a corresponding full information problem using filtering theory, and show that it follows that the market is observationally complete in the sense that any contingent claim adapted to the observable filtration is replicable. Using the solutions of the full information problem we then easily derive solutions to the original partial information problem.

Keywords: Partial information; Utility maximization; Optimal investment and consumption; Stochastic control; Portfolio theory; Path-dependent volatility (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:spr:mathme:v:83:y:2016:i:1:d:10.1007_s00186-015-0521-1