Article ID: | iaor20106032 |
Volume: | 72 |
Issue: | 1 |
Start Page Number: | 25 |
End Page Number: | 61 |
Publication Date: | Aug 2010 |
Journal: | Mathematical Methods of Operations Research |
Authors: | Sass Jrn, Wunderlich Ralf |
Keywords: | investment |
In a market with partial information we consider the optimal selection of portfolios for utility maximizing investors under joint budget and shortfall risk constraints. The shortfall risk is measured in terms of expected loss. Stock returns satisfy a stochastic differential equation. Under general conditions on the corresponding drift process we provide the optimal trading strategy using Malliavin calculus. We give extensive numerical results in the case that the drift is modeled as a continuous-time Markov chain with finitely many states. To deal with the problem of time-discretization when applying the results to market data, we propose a method to detect and correct possible tracking errors.