Utility Maximization with Bounded Shortfall Risk
in an HMM for the Stock Returns
A. Gabih, J. Saß and R. Wunderlich
In: N.Kolev, P. Morettin (eds.): Proceedings of the Second Brazilian Confrerence:
on Statistical Modelling in Insurance and Finance, Maresias, August 28 -- September 3, 2005,
Institute of Mathematics and Statistics, University of Sao Paulo, 116--121, 2005.
Abstract :
We consider a multi-stock market model where prices
satisfy a stochastic differential equation with instantaneous
rates of return modeled as an unobservable continuous time, finite
state Markov chain. For investment decisions only the prices are
available. Thus we have a hidden Markov model (HMM) for the stock
returns. The investor wishes to maximize the expected utility of
terminal wealth but under restrictions on the expected loss in
utility compared to a benchmark.
The optimal trading strategies
can be expressed in terms of observable quantities.