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Portfolio Optimization Under Partial Information With Expert Opinions

In: Finance at Fields

Author

Listed:
  • RÜDIGER FREY

    (Institute for Statistics and Mathematics, Vienna University of Economics and Business, Augasse 2-6, A-1090 Vienna, Austria)

  • ABDELALI GABIH

    (Laboratoire de Technologie de l'Information et Modélisation (TIM), ENSA-Université de Marrakech, Boulvard Abdelkrim, El Khattabi BP 575, Marrakech, Morocco)

  • RALF WUNDERLICH

    (Mathematical Institute, Brandenburg University of Technology, Postfach 101344, D-03013 Cottbus, Germany)

Abstract

This paper investigates optimal portfolio strategies in a market with partial information on the drift. The drift is modelled as a function of a continuous-time Markov chain with finitely many states which is not directly observable. Information on the drift is obtained from the observation of stock prices. Moreover, expert opinions in the form of signals at random discrete time points are included in the analysis. We derive the filtering equation for the return process and incorporate the filter into the state variables of the optimization problem. This problem is studied with dynamic programming methods. In particular, we propose a policy improvement method to obtain computable approximations of the optimal strategy. Numerical results are presented at the end.

Suggested Citation

  • Rüdiger Frey & Abdelali Gabih & Ralf Wunderlich, 2012. "Portfolio Optimization Under Partial Information With Expert Opinions," World Scientific Book Chapters, in: Matheus R Grasselli & Lane P Hughston (ed.), Finance at Fields, chapter 11, pages 265-282, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407892_0011
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