Affordable Access

On mean-variance portfolio selection under a hidden Markovian regime-switching model

Authors
Disciplines
  • Computer Science
  • Economics
  • Mathematics

Abstract

We study a mean-variance portfolio selection problem under a hidden Markovian regime-switching Black-Scholes-Merton economy. Under this model, the appreciation rate of a risky share is modulated by a continuous-time, finite-state hidden Markov chain whose states represent different states of an economy. We consider the general situation where an economic agent cannot observe the "true" state of the underlying economy and wishes to minimize the variance of the terminal wealth for a fixed level of expected terminal wealth with access only to information about the price processes. By exploiting the separation principle, we discuss the mean-variance portfolio selection problem and the filtering-estimation problem separately. We determine an explicit solution to the mean-variance problem using the stochastic maximum principle so that we do not need the assumption of Markovian controls. We also provide robust estimates of the hidden state of the chain and develop a robust filter-based EM algorithm for online recursive estimates of the unknown parameters in the model. This simplifies the filtering-estimation problem.

There are no comments yet on this publication. Be the first to share your thoughts.

Statistics

Seen <100 times
0 Comments

More articles like this

Markowitz's mean-variance portfolio selection with...

on SIAM Journal on Control and Op... Jan 01, 2003

Markowitz's Mean-Variance Portfolio Selection With...

on IEEE Transactions on Automatic... Mar 01, 2004

Continuous-time mean–variance portfolio selection...

on Insurance Mathematics and Econ... Jan 01, 2009
More articles like this..