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EnglishWe consider the problem of maximizing the expected utility for a power investor who can allocate his wealth in a stock, a defaultable security, and a money market account. The dynamics of these security prices are governed by geometric Brownian motions modulated by a hidden continuous-time finite-state Markov chain. We reduce the partially observed stochastic control problem to a complete observation risk-sensitive control problem via the filtered regime switching probabilities. We separate the latter into predefault and postdefault dynamic optimization subproblems and obtain two coupled Hamilton–Jacobi–Bellman (HJB) partial differential equations. We prove the existence and uniqueness of a globally bounded classical solution to each HJB equation and give the corresponding verification theorem. We provide a numerical analysis showing that the investor increases his holdings in stock as the filter probability of being in high-growth regimes increases, and decreases his credit risk exposure as the filter probability of being in high default risk regimes gets larger
| Titolo: | Dynamic Credit Investment in Partially Observed Markets |
| Autore/i: | PASCUCCI, ANDREA; Agostino Capponi; José E. Figueroa López |
| Autore/i Unibo: | |
| Anno: | 2015 |
| Rivista: | |
| Digital Object Identifier (DOI): | http://dx.doi.org/10.1007/s00780-015-0272-0 |
| Abstract: | We consider the problem of maximizing the expected utility for a power investor who can allocate his wealth in a stock, a defaultable security, and a money market account. The dynamics of these security prices are governed by geometric Brownian motions modulated by a hidden continuous-time finite-state Markov chain. We reduce the partially observed stochastic control problem to a complete observation risk-sensitive control problem via the filtered regime switching probabilities. We separate the latter into predefault and postdefault dynamic optimization subproblems and obtain two coupled Hamilton–Jacobi–Bellman (HJB) partial differential equations. We prove the existence and uniqueness of a globally bounded classical solution to each HJB equation and give the corresponding verification theorem. We provide a numerical analysis showing that the investor increases his holdings in stock as the filter probability of being in high-growth regimes increases, and decreases his credit risk exposure as the filter probability of being in high default risk regimes gets larger |
| Data stato definitivo: | 2015-10-27T14:51:34Z |
| Appare nelle tipologie: | 1.01 Articolo in rivista |
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http://hdl.handle.net/11585/300913
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