Optimal Solution of Investment Problems Via Linear Parabolic Equations Generated by Kalman Filter
25 Pages Posted: 31 Mar 2005
Date Written: January 12, 2005
Abstract
We consider optimal investment problems for a diffusion market model with non-observable random drifts that evolve as an Ito's process. Admissible strategies do not use direct observations of the market parameters, but rather use historical stock prices. For a non-linear problem with a general performance criterion, the optimal portfolio strategy is expressed via the solution of a scalar minimization problem and a linear parabolic equation with coefficients generated by the Kalman filter.
Keywords: Optimal portfolio, non-observable parameters, Kalman filter
JEL Classification: D52, D81, D84, G11
Suggested Citation: Suggested Citation
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