A Stochastic Flows Approach for Asset Allocation with Hidden Economic Environment | Zendy

Tak Kuen Siu | Zendy

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A Stochastic Flows Approach for Asset Allocation with Hidden Economic Environment

Author(s) -

Tak Kuen Siu

Publication year - 2015

Publication title -

international journal of stochastic analysis

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.19

H-Index - 28

eISSN - 2090-3340

pISSN - 2090-3332

DOI - 10.1155/2015/462524

Subject(s) - martingale (probability theory) , mathematics , differentiable function , asset allocation , martingale representation theorem , portfolio , mathematical economics , local martingale , representation (politics) , simple (philosophy) , asset (computer security) , mathematical optimization , econometrics , finance , economics , computer science , pure mathematics , economy , geometric brownian motion , philosophy , diffusion process , epistemology , politics , political science , law , service (business) , computer security

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.11 page(s

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