Filtering and Portfolio Optimization with Stochastic Unobserved Drift in Asset Returns
Communications in Mathematical Sciences, 13(4):935-953 (2015).
20 Pages Posted: 2 Aug 2013 Last revised: 26 Jun 2017
Date Written: August 1, 2013
We consider the problem of filtering and control in the setting of portfolio optimization in financial markets with random factors that are not directly observable. The example that we present is a commodities portfolio where yields on futures contracts are observed with some noise. Through the use of perturbation methods, we are able to show that the solution to the full problem can be approximated by the solution of a solvable HJB equation plus an explicit correction term.
Keywords: portfolio optimization, filtering, Hamilton-Jacobi-Bellman equation, asymptotic approximations
JEL Classification: G12, G13, G17
Suggested Citation: Suggested Citation