A martingale method of portfolio optimization for unobservable mean rate of return

  • In the Black-Scholes type financial market, the risky asset S 1 ( ) is supposed to satisfy dS 1 ( t ) = S 1 ( t )( b ( t ) dt + Sigma ( t ) dW ( t ) where W ( ) is a Brownian motion. The processes b ( ), Sigma ( ) are progressively measurable with respect to the filtration generated by W ( ). They are known as the mean rate of return and the volatility respectively. A portfolio is described by a progressively measurable processes Pi1 ( ), where Pi1 ( t ) gives the amount invested in the risky asset at the time t. Typically, the optimal portfolio Pi1 ( ) (that, which maximizes the expected utility), depends at the time t, among other quantities, on b ( t ) meaning that the mean rate of return shall be known in order to follow the optimal trading strategy. However, in a real-world market, no direct observation of this quantity is possible since the available information comes from the behavior of the stock prices which gives a noisy observation of b ( ). In the present work, we consider the optimal portfolio selection which uses only the observation of stock prices.

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Metadaten
Author:Juri Hinz, Ralf Korn
URN (permanent link):urn:nbn:de:hbz:386-kluedo-10796
Serie (Series number):Report in Wirtschaftsmathematik (WIMA Report) (68)
Document Type:Preprint
Language of publication:English
Year of Completion:2000
Year of Publication:2000
Publishing Institute:Technische Universität Kaiserslautern
Faculties / Organisational entities:Fachbereich Mathematik
DDC-Cassification:510 Mathematik

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