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Portfolio optimization with Markov-modulated stock prices and interest rates

Bäuerle, Nicole; Rieder, Ulrich

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.


Zugehörige Institution(en) am KIT Institut für Stochastik (STOCH)
Publikationstyp Zeitschriftenaufsatz
Jahr 2004
Sprache Englisch
Identifikator DOI: 10.1109/TAC.2004.824471
ISSN: 0018-9286
URN: urn:nbn:de:swb:90-436452
KITopen ID: 1000043645
Erschienen in IEEE Transactions on Automatic Control
Band 49
Heft 3
Seiten 442-447
Schlagworte Markov-modulation; Stochastic control; Utility maximization; Verification theorem
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