Contents Online
Communications in Mathematical Sciences
Volume 13 (2015)
Number 4
Special Issue in Honor of George Papanicolaou’s 70th Birthday
Guest Editors: Liliana Borcea, Jean-Pierre Fouque, Shi Jin, Lenya Ryzhik, and Jack Xin
Filtering and portfolio optimization with stochastic unobserved drift in asset returns
Pages: 935 – 953
DOI: https://dx.doi.org/10.4310/CMS.2015.v13.n4.a5
Authors
Abstract
We consider the problem of filtering and control in the setting of portfolio optimization in financial markets with random factors that are not directly observable. The example that we present is a commodities portfolio where yields on futures contracts are observed with some noise. Through the use of perturbation methods, we are able to show that the solution to the full problem can be approximated by the solution of a solvable HJB equation plus an explicit correction term.
Keywords
portfolio optimization, filtering, Hamilton-Jacobi-Bellman equation, asymptotic approximations
2010 Mathematics Subject Classification
35C20, 35Q93, 60G35, 91G20
Published 12 March 2015