Risk-sensitive investment in a finite-factor model

A new jump diffusion regime-switching model is introduced, which allows for linking jumps in asset prices with regime changes. We prove the existence and uniqueness of the solution to the risk-sensitive asset management criterion maximisation problem in this setting. We provide an ODE for the optimal value function, which may be efficiently solved numerically. Relevant probability measure changes are discussed in the appendix. The approach of Klebaner and Lipster (2014) is used to prove the martingale property of the relevant density processes.Comment: 23 pages, 1 figur

A Proposal of Portfolio Choice for Infinitely Divisible Distributions of Assets Returns

In the paper we present a proposal of augmenting portfolio analysis for the infinitely divisible distributions of returns - so that the prices of assets can follow Lévy processes. In this article we propose a model in which asset prices follow multidimensional Lévy process and the interdependence between assets are described by covariance and multidimensional jump measure. Then we propose to choose the optimal portfolio based on three criteria: mean return, total variance of diffusion and a measure of jump risk. We also consider augmenting this multi-criteria choice setup for the costs of possible portfolio adjustments.portfolio analysis, Lévy processes, jump-diffusion models