Title :
Portfolio optimization with Markov-modulated stock prices and interest rates
Author :
Bäuerle, Nicole ; Rieder, Ulrich
Author_Institution :
Abt. fur Math. VII, Univ. Ulm, Germany
fDate :
3/1/2004 12:00:00 AM
Abstract :
A financial market with one bond and one stock is considered where the risk free interest rate, the appreciation rate of the stock and the volatility of the stock depend on an external finite state Markov chain. We investigate the problem of maximizing the expected utility from terminal wealth and solve it by stochastic control methods for different utility functions. Due to explicit solutions it is possible to compare the value function of the problem to one where we have constant (average) market data. The case of benchmark optimization is also considered.
Keywords :
Markov processes; economic indicators; investment; optimisation; stock markets; Markov-modulated stock prices; benchmark optimization; bond; financial market; finite-state Markov chain; market data; portfolio optimization; risk free interest rates; stochastic control; stock appreciation rate; stock volatility; terminal wealth; utility functions; Bonding; Diffusion processes; Economic indicators; Investments; Mathematical model; Optimization methods; Portfolios; Stochastic processes;
Journal_Title :
Automatic Control, IEEE Transactions on
DOI :
10.1109/TAC.2004.824471
