Dynamic Portfolio Choice under Incomplete Information

Under incomplete information, this paper studies the problem of dynamic portfolio choice of an investor who maximizes the power utility of terminal portfolio wealth. It applies stochastic control method to obtain the closed-form solution of optimal dynamic portfolio choice and uses the Bayesian rule to estimate the unknown model parameters to do an empirical study on two different samples of Shanghai Exchange Composite Index. Results show, incomplete information means that the valuation of model parameters exist estimation risk, which leads to the hedge demand of portfolio; the effect of estimation risk is more significant with the increasing of investment horizon, and the decreasing of information and investor´s risk-aversion degree; the predictability of return process enhances the effect of estimation risk.