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Continuous-Time Mean-Variance Asset-Liability Management with Hidden Markovian Regime Switching

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  • Ling Zhang

Abstract

This paper considers a continuous-time mean-variance asset-liability management problem with incompletely observable information. An investor can only observe the prices of the asset and liability and the dynamics of the unobservable states of the underlying financial market is described by a hidden Markovian chain. The price of the risky asset is assumed to be governed by a hidden Markovian regime switching geometric Brownian motion and the liability is assumed to follow a hidden Markovian regime switching Brownian motion with drift, respectively. The appreciation rates of the risky asset and the liability are modulated by the hidden Markovian chain. By using the separation principle, the filtering-estimation problem and the mean-variance asset-liability management problem are discussed. The explicit expressions for the optimal asset-liability management strategy and the mean-variance efficient frontier are determined by using the stochastic maximum principle.

Suggested Citation

  • Ling Zhang, 2014. "Continuous-Time Mean-Variance Asset-Liability Management with Hidden Markovian Regime Switching," Mathematical Problems in Engineering, Hindawi, vol. 2014, pages 1-9, June.
    • Handle: RePEc:hin:jnlmpe:140140
    DOI: 10.1155/2014/140140
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    Cited by:

    1. Yu Yang & Yonghong Wu & Benchawan Wiwatanapataphee, 2020. "Time-consistent mean–variance asset-liability management in a regime-switching jump-diffusion market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(4), pages 401-427, December.

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