A Stochastic Flows Approach for Asset Allocation with Hidden Economic Environment. (27th January 2015)

• Record Type: Journal Article
• Authors: Siu, Tak Kuen
• Other Names: Pham Huyên Academic Editor.
• Is Part Of: International journal of stochastic analysis. Volume 2015(2015)
• Publication Date: 2015-01-27
• Subjects: Stochastic analysis -- Periodicals; Stochastic analysis; Periodicals; 519.22
• DOI: 10.1155/2015/462524
• Languages: English
• ISSNs: 2090-3332

Abstract

Abstract : An optimal asset allocation problem for a quite general class of utility functions is discussed in a simple two-state Markovian regime-switching model, where the appreciation rate of a risky share changes over time according to the state of a hidden economy. As usual, standard filtering theory is used to transform a financial model with hidden information into one with complete information, where a martingale approach is applied to discuss the optimal asset allocation problem. Using a martingale representation coupled with stochastic flows of diffeomorphisms for the filtering equation, the integrand in the martingale representation is identified which gives rise to an optimal portfolio strategy under some differentiability conditions.