A Benchmark Approach to Portfolio Optimization under Partial Information
This paper proposes a filtering methodology for portfolio optimization when some factors of the underlying model are only partially observed. The level of information is given by the observed quantities that are here supposed to be the primary securities and empirical log-price covariations. For a given level of information we determine the growth optimal portfolio, identify locally optimal portfolios that are located on a corresponding Markowitz efficient frontier and present an approach for expected utility maximization. We also present an expected utility indifference pricing approach under partial information for the pricing of nonreplicable contracts. This results in a real world pricing formula under partial information that turns out to be independent of the subjective utility of the investor and for which an equivalent risk neutral probability measure need not exist.
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Volume (Year): 14 (2007)
Issue (Month): 1 (March)
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References listed on IDEAS
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- Eckhard Platen, 2004.
"Diversified Portfolios with Jumps in a Benchmark Framework,"
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- Eckhard Platen, 2004. "Diversified Portfolios with Jumps in a Benchmark Framework," Research Paper Series 129, Quantitative Finance Research Centre, University of Technology, Sydney.
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- Eckhard Platen & Wolfgang Runggaldier, 2004.
"A Benchmark Approach to Filtering in Finance,"
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- Camilla LandÊn, 2000. "Bond pricing in a hidden Markov model of the short rate," Finance and Stochastics, Springer, vol. 4(4), pages 371-389.
- Bhar Ramaprasad & Chiarella Carl & Runggaldier Wolfgang J., 2004. "Inferring the Forward Looking Equity Risk Premium from Derivative Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(1), pages 1-26, March.
- Jörn Sass & Ulrich Haussmann, 2004. "Optimizing the terminal wealth under partial information: The drift process as a continuous time Markov chain," Finance and Stochastics, Springer, vol. 8(4), pages 553-577, November.
- Nicole Bäuerle & Ulrich Rieder, 2007. "Portfolio Optimization With Jumps And Unobservable Intensity Process," Mathematical Finance, Wiley Blackwell, vol. 17(2), pages 205-224.
- Gombani, Andrea & Jaschke, Stefan R. & Runggaldier, Wolfgang J., 2005. "A filtered no arbitrage model for term structures from noisy data," Stochastic Processes and their Applications, Elsevier, vol. 115(3), pages 381-400, March.
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