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Ruin problems and myopic portfolio optimization in continuous trading

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  • Aase, Knut Kristian

Abstract

In continuous trading, ruin problems are important for several reasons. ln the first part of the paper a test criterion for bankruptcy is developed. In the present framework one implicitly assumes the investor's wealth to be different from zero, otherwise the model is not well-defined. It is of practical interest to be able to investigate if a certain stationary Markovian financial strategy may lead to ruin. If ruin can occur, its probability is found to satisfy a partial differential equation. In the second part of the paper, a portfolio optimization problem is investigated and solved using Doléans-Dade's exponential formula. The optimality criterion used is to maximize the expected rate of growth. Because of the special structure of the problem, we avoid the Bellman equation. This fact is fortunate, since the Bellman equation is often very complicated to solve analytically.

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Bibliographic Info

Article provided by Elsevier in its journal Stochastic Processes and their Applications.

Volume (Year): 21 (1986)
Issue (Month): 2 (February)
Pages: 213-227

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Handle: RePEc:eee:spapps:v:21:y:1986:i:2:p:213-227

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Related research

Keywords: ruin problems portfolio optimization stochastic differential equations semimartingales explosions the Doleans-Dade formula;

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Cited by:
  1. Wee, In-Suk, 1999. "Stability for multidimensional jump-diffusion processes," Stochastic Processes and their Applications, Elsevier, vol. 80(2), pages 193-209, April.
  2. Liu, Jun & Longstaff, Francis & Pan, Jun, 2001. "Dynamic Asset Allocation with Event Risk," University of California at Los Angeles, Anderson Graduate School of Management qt9fm6t5nb, Anderson Graduate School of Management, UCLA.
  3. Stephan Dieckmann & Michael Gallmeyer, . "The Equilibrium Allocation of Diffusive and Jump Risks with Heterogeneous Agents," GSIA Working Papers 2003-E36, Carnegie Mellon University, Tepper School of Business.

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