Sequential \delta-Optimal Consumption and Investment for Stochastic Volatility Markets with Unknown Parameters

DOI10.1137/S0040585X97T987867MaRDI QIDQ3178724zbMATH OpenFDO

Authors Belkacem Berdjane, Serguei Pergamenchtchikov

Publication date 7 December 2016

Published in Theory of Probability & Its Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1210.5111

sequential analysis Hamilton-Jacobi-Bellman equation stochastic volatility optimal consumption and investment Black-Scholes market model truncate sequential estimate

Mathematics Subject Classification ID

Dynamic programming (90C39) Portfolio theory (91G10) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We consider an optimal investment and consumption problem for a Black-Scholes financial market with stochastic volatility and unknown stock appreciation rate. The volatility parameter is driven by an external economic factor modeled as a diffusion process of Ornstein-Uhlenbeck type with unknown drift. We use the dynamical programming approach and find an optimal financial strategy which depends on the drift parameter. To estimate the drift coefficient we observe the economic factor

Y

in an interval

[0, T_{0}]

for fixed

T_{0} > 0

, and use sequential estimation. We show, that the consumption and investment strategy calculated through this sequential procedure is

d e l t a

-optimal.

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