Constrained stochastic LQ control with regime switching and application to portfolio selection
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Publication:2117450
DOI10.1214/21-AAP1684zbMATH Open1484.91425arXiv2004.11832MaRDI QIDQ2117450FDOQ2117450
Xiao-Min Shi, Ying Hu, Zuo Quan Xu
Publication date: 21 March 2022
Published in: The Annals of Applied Probability (Search for Journal in Brave)
Abstract: This paper is concerned with a stochastic linear-quadratic optimal control problem with regime switching, random coefficients, and cone control constraint. The randomness of the coefficients comes from two aspects: the Brownian motion and the Markov chain. Using It^{o}'s lemma for Markov chain, we obtain the optimal state feedback control and optimal cost value explicitly via two new systems of extended stochastic Riccati equations (ESREs). We prove the existence and uniqueness of the two ESREs using tools including multidimensional comparison theorem, truncation function technique, log transformation and the John-Nirenberg inequality. These results are then applied to study mean-variance portfolio selection problems with and without short-selling prohibition with random parameters depending on both the Brownian motion and the Markov chain. Finally, the efficient portfolios and efficient frontiers are presented in closed forms.
Full work available at URL: https://arxiv.org/abs/2004.11832
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- scientific article; zbMATH DE number 1642351
- Stochastic Linear-Quadratic Optimal Control Problems with Random Coefficients and Markovian Regime Switching System
regime switchingexistenceuniquenessmean-variance portfolio selectionconstrained stochastic LQ controlextended stochastic Riccati equation
Portfolio theory (91G10) Linear-quadratic optimal control problems (49N10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)
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Cited In (14)
- Constrained monotone mean-variance investment-reinsurance under the Cramér-Lundberg model with random coefficients
- Stochastic Linear-Quadratic Optimal Control Problems with Random Coefficients and Markovian Regime Switching System
- Constrained LQ problem with a random jump and application to portfolio selection
- Convergent Numerical Scheme for Singular Stochastic Control with State Constraints in a Portfolio Selection Problem
- Constrained Monotone Mean-Variance Problem with Random Coefficients
- Constrained mean-variance investment-reinsurance under the Cramér-Lundberg model with random coefficients
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- Constrained Stochastic LQ Control with Random Coefficients, and Application to Portfolio Selection
- Optimal consumption-investment with constraints in a regime switching market with random coefficients
- Multidimensional indefinite stochastic Riccati equations and zero-sum stochastic linear-quadratic differential games with non-Markovian regime switching
- Stochastic linear-quadratic control with a jump and regime switching on a random horizon
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