Article ID Journal Published Year Pages File Type
5000153 Automatica 2016 12 Pages PDF
Abstract
This paper studies an optimal portfolio selection problem in the presence of the Maximum Value-at-Risk (MVaR) constraint in a hidden Markovian regime-switching environment. The price dynamics of n risky assets are governed by a hidden Markovian regime-switching model with a hidden Markov chain whose states represent the states of an economy. We formulate the problem as a constrained utility maximization problem over a finite time horizon and then reduce it to solving a Hamilton-Jacobi-Bellman (HJB) equation using the separation principle. The MVaR constraint for n risky assets plus one riskless asset is derived and the method of Lagrange multiplier is used to deal with the constraint. A numerical algorithm is then adopted to solve the HJB equation. Numerical results are provided to demonstrate the implementation of the algorithm.
Related Topics
Physical Sciences and Engineering Engineering Control and Systems Engineering
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