Proceedings of the Fifth Symposium of Risk Analysis and Risk Management in Western China (WRARM 2017)

Optimal Portfolio Choice under Hidden Regime Switching Model

Authors
Zhiying Chen, Xuanhua Peng, Yongkui Li
Corresponding Author
Zhiying Chen
Available Online November 2017.
DOI
10.2991/wrarm-17.2017.43How to use a DOI?
Keywords
Portfolio choice; hidden regime switching; stochastic control methods; Monte Carlo simulation
Abstract

We investigate a portfolio optimization problem in a continuous-time Markov-modulated financial market. The unobservable mean return of a risky asset follows a continuous-time, two-state Markov chain whose states are interpreted as different states of market. Using results from filter theory, we reduce this problem to one with complete observation. We solve the problem by stochastic control methods and the optimal portfolio can be explicitly characterized by stochastic integrals. The Monte Carlo simulations are implemented to compute the optimal portfolio allocations. The results show that state uncertainty have a great influence on optimal portfolio choice. The parameter uncertainty prompts the investor to hedge against unanticipated changes in the state variables.

Copyright
© 2017, the Authors. Published by Atlantis Press.
Open Access
This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

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Volume Title
Proceedings of the Fifth Symposium of Risk Analysis and Risk Management in Western China (WRARM 2017)
Series
Advances in Intelligent Systems Research
Publication Date
November 2017
ISBN
10.2991/wrarm-17.2017.43
ISSN
1951-6851
DOI
10.2991/wrarm-17.2017.43How to use a DOI?
Copyright
© 2017, the Authors. Published by Atlantis Press.
Open Access
This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

Cite this article

TY  - CONF
AU  - Zhiying Chen
AU  - Xuanhua Peng
AU  - Yongkui Li
PY  - 2017/11
DA  - 2017/11
TI  - Optimal Portfolio Choice under Hidden Regime Switching Model
BT  - Proceedings of the Fifth Symposium of Risk Analysis and Risk Management in Western China (WRARM 2017)
PB  - Atlantis Press
SP  - 244
EP  - 249
SN  - 1951-6851
UR  - https://doi.org/10.2991/wrarm-17.2017.43
DO  - 10.2991/wrarm-17.2017.43
ID  - Chen2017/11
ER  -