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Portfolio selection under incomplete information

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  • Brendle, Simon

Abstract

We study an optimal investment problem under incomplete information and power utility. We analytically solve the Bellman equation, and identify the optimal portfolio policy. Moreover, we compare the solution to the value function in the fully observable case, and quantify the loss of utility due to incomplete information.

Suggested Citation

  • Brendle, Simon, 2006. "Portfolio selection under incomplete information," Stochastic Processes and their Applications, Elsevier, vol. 116(5), pages 701-723, May.
  • Handle: RePEc:eee:spapps:v:116:y:2006:i:5:p:701-723
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    References listed on IDEAS

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    1. Lakner, Peter, 1998. "Optimal trading strategy for an investor: the case of partial information," Stochastic Processes and their Applications, Elsevier, vol. 76(1), pages 77-97, August.
    2. Gady Zohar, 2001. "A Generalized Cameron-Martin Formula with Applications to Partially Observed Dynamic Portfolio Optimization," Mathematical Finance, Wiley Blackwell, vol. 11(4), pages 475-494.
    3. Brennan, Michael J & Xia, Yihong, 2001. "Assessing Asset Pricing Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 905-942.
    4. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 141-161.
    5. Lakner, Peter, 1995. "Utility maximization with partial information," Stochastic Processes and their Applications, Elsevier, vol. 56(2), pages 247-273, April.
    6. Benes, Václav E. & Karatzas, Ioannis, 1983. "Estimation and control for linear, partially observable systems with non-gaussian initial distribution," Stochastic Processes and their Applications, Elsevier, vol. 14(3), pages 233-248, March.
    7. M. J. Brennan, 1998. "The Role of Learning in Dynamic Portfolio Decisions," Review of Finance, European Finance Association, vol. 1(3), pages 295-306.
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    Citations

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    Cited by:

    1. Li, Yongwu & Qiao, Han & Wang, Shouyang & Zhang, Ling, 2015. "Time-consistent investment strategy under partial information," Insurance: Mathematics and Economics, Elsevier, vol. 65(C), pages 187-197.
    2. Xiang Yu, 2011. "An Explicit Example Of Optimal Portfolio-Consumption Choices With Habit Formation And Partial Observations," Papers 1112.2939, arXiv.org, revised Aug 2014.
    3. Jörn Sass & Ralf Wunderlich, 2010. "Optimal portfolio policies under bounded expected loss and partial information," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 72(1), pages 25-61, August.
    4. Albina Danilova & Michael Monoyios & Andrew Ng, 2009. "Optimal investment with inside information and parameter uncertainty," Papers 0911.3117, arXiv.org, revised Feb 2010.
    5. Michael Monoyios, 2010. "Utility-Based Valuation and Hedging of Basis Risk With Partial Information," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(6), pages 519-551.
    6. repec:spr:compst:v:71:y:2010:i:2:p:371-399 is not listed on IDEAS
    7. Wolfgang Putschögl & Jörn Sass, 2008. "Optimal consumption and investment under partial information," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 31(2), pages 137-170, November.
    8. Tomas Björk & Mark Davis & Camilla Landén, 2010. "Optimal investment under partial information," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 71(2), pages 371-399, April.
    9. Ahmed Bel Hadj Ayed & Gr'egoire Loeper & Fr'ed'eric Abergel, 2015. "Forecasting trends with asset prices," Papers 1504.03934, arXiv.org, revised Apr 2015.
    10. Jorn Sass & Dorothee Westphal & Ralf Wunderlich, 2016. "Expert Opinions and Logarithmic Utility Maximization for Multivariate Stock Returns with Gaussian Drift," Papers 1601.08155, arXiv.org, revised Mar 2016.
    11. repec:spr:compst:v:72:y:2010:i:1:p:25-61 is not listed on IDEAS

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