Risk sensitive control of finite state Markov chains in discrete time, with applications to portfolio management

Risk sensitive control of finite state Markov chains in discrete time, with applications to portfolio management

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Article ID: iaor20002164
Country: Germany
Volume: 50
Issue: 2
Start Page Number: 167
End Page Number: 188
Publication Date: Jan 1999
Journal: Mathematical Methods of Operations Research (Heidelberg)
Authors: , ,
Keywords: markov processes
Abstract:

In this paper we extend standard dynamic programming results for the risk sensitive optimal control of discrete time Markov chains to a new class of models. The state space is only finite, but now the assumptions about the Markov transition matrix are much less restrictive. Our results are then applied to the financial problem of managing a portfolio of assets which are affected by Markovian microeconomic and macroeconomic factors and where the investor seeks to maximize the portfolio's risk adjusted growth rate.

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