Quotation Eksi-Altay, Zehra, Ku, Hyejin. 2017. Portfolio optimization for a large investor under partial information with price impact. Mathematical Methods of Operations Research, 86 (3), 601-623.


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Abstract

This paper studies portfolio optimization problems in a market with partial information and price impact. We consider a large investor with an objective of expected utility maximization from terminal wealth. The drift of the underlying price process is modeled as a diffusion affected by a continuous-timeMarkov chain and the actions of the large investor. Using the stochastic filtering theory, we reduce the optimal control problem under partial information to the one with complete observation. For logarithmic and power utility cases we solve the utility maximization problem explicitly and we obtain optimal investment strategies in the feedback form.We compare the value functions to those for the case without price impact in Bäuerle and Rieder (IEEE Trans Autom Control 49(3):442–447, 2004) and Bäuerle and Rieder (J Appl Prob 362–378, 2005). It turns out that the investor would be better off due to the presence of a price impact both in complete-information and partial-information settings. Moreover, the presence of the price impact results in a shift, which depends on the distance to final time and on the state of the filter, on the optimal control strategy.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Mathematical Methods of Operations Research
Citation Index SCI
WU-Journal-Rating new FIN-A, INF-A, STRAT-B, WH-B
Language English
Title Portfolio optimization for a large investor under partial information with price impact
Volume 86
Number 3
Year 2017
Page from 601
Page to 623
Reviewed? Y
DOI http://dx.doi.org/10.1007/s00186-017-0589-x
Open Access N

Associations

People
Eksi-Altay, Zehra (Details)
External
Ku, Hyejin (York University, Canada)
Organization
Institute for Statistics and Mathematics IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
1118 Probability theory (Details)
1137 Financial mathematics (Details)
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