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Optimal trading strategy for an investor: the case of partial information

  • Lakner, Peter
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    We shall address here the optimization problem of an investor who wants to maximize the expected utility from terminal wealth. The novelty of this paper is that the drift process and the driving Brownian motion appearing in the stochastic differential equation for the security prices are not assumed to be observable for investors in the market. Investors observe security prices and interest rates only. The drift process will be modelled by a Gaussian process, which in a special case becomes a multi-dimensional mean-reverting Ornstein-Uhlenbeck process. The main result of the paper is an explicit representation for the optimal trading strategy for a wide range of utility functions.

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

    Volume (Year): 76 (1998)
    Issue (Month): 1 (August)
    Pages: 77-97

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    Handle: RePEc:eee:spapps:v:76:y:1998:i:1:p:77-97
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    1. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
    2. He, Hua & Pearson, Neil D., 1991. "Consumption and portfolio policies with incomplete markets and short-sale constraints: The infinite dimensional case," Journal of Economic Theory, Elsevier, vol. 54(2), pages 259-304, August.
    3. Detemple, Jerome B., 1991. "Further results on asset pricing with incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 425-453, July.
    4. Dothan, Michael U & Feldman, David, 1986. " Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy," Journal of Finance, American Finance Association, vol. 41(2), pages 369-82, June.
    5. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    6. Lakner, Peter, 1995. "Utility maximization with partial information," Stochastic Processes and their Applications, Elsevier, vol. 56(2), pages 247-273, April.
    7. Duffie, Darrell & Zame, William, 1989. "The Consumption-Based Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 57(6), pages 1279-97, November.
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