NDLI: Utility Maximization with Convex Constraints and Partial Information

Content Provider	Springer Nature Link
Author	Sass, Jörn
Copyright Year	2007
Abstract	We consider a market model where stock returns satisfy a stochastic differential equation with an unobservable, stochastic drift process. The investor’s objective is to maximize expected utility of terminal wealth, but investment decisions are based on the knowledge of the stock prices only. The performance of the resulting highly risky strategies can be improved considerably by imposing convex constraints covering e.g. short selling restrictions. Using filtering methods we transform the model to a model with full information. We provide a verification result and show how results on optimization under convex constraints can be used directly for a continuous time Markov chain model for the drift. In special cases we derive representations of the optimal trading strategies, including a stochastic volatility model.
Ending Page	238
Page Count	18
Starting Page	221
File Format	PDF
ISSN	01678019
e-ISSN	15729036
Journal	Acta Applicandae Mathematica
Issue Number	1-3
Volume Number	97
Language	English
Publisher	Kluwer Academic Publishers
Publisher Date	2007-04-05
Publisher Place	Dordrecht
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Portfolio optimization Filtering Mathematical and Computational Physics Computer Science Mechanics Mathematics Martingales with continuous parameter Constrained strategies Statistical Physics
Content Type	Text
Resource Type	Article
Subject	Applied Mathematics

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Utility Maximization with Convex Constraints and Partial Information