Non-linear filtering and optimal investment under partial information for stochastic volatility models

DOI10.1007/S00186-017-0609-XzbMATH Open1410.91419arXiv1407.1595OpenAlexW2123910242WikidataQ129981746 ScholiaQ129981746MaRDI QIDQ1650844FDOQ1650844

Authors: Dalia Ibrahim, Frédéric Abergel 

Publication date: 13 July 2018

Published in: Mathematical Methods of Operations Research (Search for Journal in Brave)

Abstract: This paper studies the question of filtering and maximizing terminal wealth from expected utility in a partially information stochastic volatility models. The special features is that the only information available to the investor is the one generated by the asset prices, and the unobservable processes will be modeled by a stochastic differential equations. Using the change of measure techniques, the partial observation context can be transformed into a full information context such that coefficients depend only on past history of observed prices (filters processes). Adapting the stochastic non-linear filtering, we show that under some assumptions on the model coefficients, the estimation of the filters depend on a priorimodels for the trend and the stochastic volatility. Moreover, these filters satisfy a stochastic partial differential equations named "Kushner-Stratonovich equations". Using the martingale duality approach in this partially observed incomplete model, we can characterize the value function and the optimal portfolio. The main result here is that the dual value function associated to the martingale approach can be expressed, via the dynamic programmingapproach, in terms of the solution to a semilinear partial differential equation. We illustrate our results with some examples of stochastic volatility models popular in the financial literature.

Full work available at URL: https://arxiv.org/abs/1407.1595

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zbMATH Keywords

partial informationstochastic volatilityutility maximizationnonlinear filteringsemilinear partial differential equationKushner-Stratonovich equationsmartingale duality method

Mathematics Subject Classification ID

PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Portfolio theory (91G10) Generalizations of martingales (60G48) Financial applications of other theories (91G80)

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Cited In (4)

• An optimal consumption and investment problem with partial information
• Optimal portfolio in partially observed stochastic volatility models.
• Optimal Solution of Investment Problems Via Linear Parabolic Equations Generated by Kalman Filter
• Linear and non-linear filtering in mathematical finance: a review

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