A risk-sensitive stochastic control approach to an optimal investment problem with partial information (Q854287)

The authors study an infinite time horizon optimal investment problem where an investor tries to maximize the probability of beating a given index. Mathematically this optimal investment problem is formulated as a large deviation control problem. The market model considered consists of one riskless, one risky asset, and one factor process modeling an economic factor (e.g., dividend yields, inflation rate, unemployment rates, etc). Strategies are chosen in such a way that the investor observes only past information of a risky asset. The dual problem, which is equivalent to an ergodic risk-sensitive stochastic control problem with partial information, is deduced. A solution is constructed by using a solution of an algebraic Riccati equation, which is the limit equation derived from a finite time horizon problem with partial information. As a result, explicit representations of the value function and the optimal strategy for the problem are obtained.