Continuous-time mean-variance portfolio selection with partial information

W.K. Pang, Y.H. Ni, Xun Li, Ka Fai Cedric Yiu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

This paper studies a continuous-time market under a stochastic environment where an agent, having specified an investment horizon and a target terminal mean return, seeks to minimize the variance of the return with multiple stocks and a bond. In the model considered here, the mean returns of individual assets are explicitly affected by underlying Gaussian economic factors. Using past and present information of the asset prices, a partial-information stochastic optimal control problem with random coefficients is formulated. Here, the partial information is due to the fact that the economic factors can not be directly observed. Using dynamic programming theory, we show that the optimal portfolio strategy can be constructed by solving a deterministic forward Riccati-type ordinary differential equation and two linear deterministic backward ordinary differential equations.
Original languageEnglish
Pages (from-to)353-365
Number of pages13
JournalJournal of mathematical finance
Volume4
Issue number5
DOIs
Publication statusPublished - 2014

Keywords

  • Mean-Variance portfolio selection
  • Partial information
  • Filtering

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