9 research outputs found
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
On the Separation of Estimation and Control in Risk-Sensitive Investment Problems under Incomplete Observation
A typical approach to tackle stochastic control problems with partial
observation is to separate the control and estimation tasks. However, it is
well known that this separation generally fails to deliver an actual optimal
solution for risk-sensitive control problems. This paper investigates the
separability of a general class of risk-sensitive investment management
problems when a finite-dimensional filter exists. We show that the
corresponding separated problem, where instead of the unobserved quantities,
one considers their conditional filter distribution given the observations, is
strictly equivalent to the original control problem. We widen the applicability
of the so-called Modified Zakai Equation (MZE) for the study of the separated
problem and prove that the MZE simplifies to a PDE in our approach.
Furthermore, we derive criteria for separability. We do not solve the separated
control problem but note that the existence of a finite-dimensional filter
leads to a finite state space for the separated problem. Hence, the difficulty
is equivalent to solving a complete observation risk-sensitive problem. Our
results have implications for existing risk-sensitive investment management
models with partial observations in that they establish their separability.
Their implications for future research on new applications is mainly to provide
conditions to ensure separability
Crash Prediction Using Fundamental Variables: Evidence from Mainland China
This article investigates how fundamental crash prediction models perform in mainland China’s fast-growing equity markets. We apply three families of fundamental models, price-to-earnings ratio, cyclically adjusted price-to-earnings ratio, and bond-stock earnings yield differential, to the Shanghai and Shenzhen stock indices. Our statistical analysis supports the dominant view that Chinese equity markets behave different from U.S. markets. We find that fundamental models are significant predictors of equity market crashes in China despite these differences. Finally, we show how to use these crash prediction models to improve active portfolio management
Jump-Diffusion Asset-Liability Management Via Risk-Sensitive Control
Abstract In this paper, we use risk-sensitive control methods to solve a jumpdiffusion Asset-Liability Management (ALM) problem. We show that the ALM problem admits a unique classical (C 1,2 ) solution under two different sets of assumptions
Risk-sensitive benchmarked asset management
This paper extends the risk-sensitive asset management theory developed by Bielecki and Pliska and by Kuroda and Nagai to the case where the investor's objective is to outperform an investment benchmark. The main result is a mutual fund theorem. Every investor following the same benchmark will take positions, in proportions dependent on his/her risk sensitivity coefficient, in two funds: the log-optimal portfolio and a second fund which adjusts for the correlation between the traded assets, the benchmark and the underlying valuation factors.Asset management, Risk-sensitive stochastic control, Outperformance, Dynamic programming, Benchmark, Kelly criterion,