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Growth Optimal Portfolio for unobservable Markov-modulated markets

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  • I. Venkat Appal Raju
  • N. Selvaraju

Abstract

The paper studies the benchmark approach for pricing and hedging in incomplete markets where the investor has to filter the incomplete information. We consider a jump diffusion Markov modulated market model and derive the Growth Optimal Portfolio (GOP), by using the stochastic control method. Using GOP, we price and hedge European options where the existence of the equivalent martingale measure is not necessary.

Suggested Citation

  • I. Venkat Appal Raju & N. Selvaraju, 2012. "Growth Optimal Portfolio for unobservable Markov-modulated markets," International Journal of Mathematics in Operational Research, Inderscience Enterprises Ltd, vol. 4(1), pages 31-40.
    • Handle: RePEc:ids:ijmore:v:4:y:2012:i:1:p:31-40
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    References listed on IDEAS

    as
    1. Eckhard Platen, 2001. "Arbitrage in Continuous Complete Markets," Research Paper Series 72, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Eckhard Platen, 2004. "A class of complete benchmark models with intensity-based jumps," Published Paper Series 2004-5, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Eckhard Platen & Wolfgang Runggaldier, 2004. "A Benchmark Approach to Filtering in Finance," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 79-105, March.
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