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Risk Sensitive Investment Management with Affine Processes: a Viscosity Approach

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  • Mark Davis
  • Sebastien Lleo
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    Abstract

    In this paper, we extend the jump-diffusion model proposed by Davis and Lleo to include jumps in asset prices as well as valuation factors. The criterion, following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive optimization (equivalent to maximizing the expected growth rate subject to a constraint on variance.) In this setting, the Hamilton- Jacobi-Bellman equation is a partial integro-differential PDE. The main result of the paper is to show that the value function of the control problem is the unique viscosity solution of the Hamilton-Jacobi-Bellman equation.

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    File URL: http://arxiv.org/pdf/1003.2521
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1003.2521.

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    Date of creation: Mar 2010
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    Publication status: Published in in "Recent Advances in Financial Engineering 2009 - Proceedings of the KIER-TMU International Workshop on Financial Engineering 2009." M. Kijima, C. Hara and K. Tanaka editors. World Scientific Publishing Co. 2010.
    Handle: RePEc:arx:papers:1003.2521

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    Web page: http://arxiv.org/

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