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Portfolio Optimization Under Partial Information With Expert Opinions

Author

Listed:
  • RÜDIGER FREY

    (Institute for Statistics and Mathematics, Vienna University of Economics and Business, Augasse 2-6, A-1090 Vienna, Austria)

  • ABDELALI GABIH

    (Laboratoire de Technologie de l'Information et Modélisation (TIM), ENSA-Université de Marrakech, Boulvard Abdelkrim, El Khattabi BP 575, Marrakech, Morocco)

  • RALF WUNDERLICH

    (Mathematical Institute, Brandenburg University of Technology, Postfach 101344, D-03013 Cottbus, Germany)

Abstract

This paper investigates optimal portfolio strategies in a market with partial information on the drift. The drift is modelled as a function of a continuous-time Markov chain with finitely many states which is not directly observable. Information on the drift is obtained from the observation of stock prices. Moreover, expert opinions in the form of signals at random discrete time points are included in the analysis. We derive the filtering equation for the return process and incorporate the filter into the state variables of the optimization problem. This problem is studied with dynamic programming methods. In particular, we propose a policy improvement method to obtain computable approximations of the optimal strategy. Numerical results are presented at the end.

Suggested Citation

  • Rüdiger Frey & Abdelali Gabih & Ralf Wunderlich, 2012. "Portfolio Optimization Under Partial Information With Expert Opinions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(01), pages 1-18.
    • Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:01:n:s0219024911006486
    DOI: 10.1142/S0219024911006486
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    References listed on IDEAS

    as
    1. Mark Davis & Sebastien Lleo, 2010. "Jump-Diffusion Risk-Sensitive Asset Management I: Diffusion Factor Model," Papers 1001.1379, arXiv.org, revised Nov 2010.
    2. Mark H. A. Davis & Sébastien Lleo, 2014. "Risk-Sensitive Asset Management," World Scientific Book Chapters, in: RISK-SENSITIVE INVESTMENT MANAGEMENT, chapter 2, pages 17-40, World Scientific Publishing Co. Pte. Ltd..
    3. Mark H. A. Davis & Sebastien Lleo, 2009. "Jump-Diffusion Risk-Sensitive Asset Management," Papers 0905.4740, arXiv.org, revised Mar 2010.
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